The latest Senior Loan Officer Opinion Survey (SLOOS) was released by the Federal Reserve for the third quarter. This dataset contains important information on lending conditions across the U.S. economy. Economists, policymakers, investors, and analysts track this data as credit tightening (or loosening) can lead to economic growth or decline.
As such, this data is also important for the home building industry to track as it can capture the impacts of the “long and variable lags” of the Fed rate hikes over the past 18-plus months. In the SLOOS report, we can track credit availability for commercial, construction, and land development loans. The NAHB provides a similar credit read on acquisition, development, and construction (AD&C) loans. See chart below.
As seen, credit tightened sharply at the start of the pandemic and again as the Fed started raising rates in early 2022. So far, this cycle has produced some turbulence, including the bank failures earlier this year, but has yet to produce a protracted downturn.
Impact of Tighter Credit Standards on For-Sale Builders
Currently, 70% of builders surveyed by Zonda expect starts to be up next year. However, tighter lending could put downward pressure on these expectations, especially for smaller and midsized builders. According to the NAHB’s latest survey, 80% of builders experienced higher rates on available loans, 57% experienced reduced dollar amounts available for lending, and 52% of builders reported that lenders reduced loan-to-cost ratios.
We can see the aforementioned higher rates in data reported by the NAHB below:
Notice there was a slight loosening since late last year in land development and acquisition costs, but the cost of credit is still higher than at any time since 2018.
Impact of Tighter Credit Standards on For-Rent Developers
For developers focused specifically on rental units, the market has also shown signs of slowing. The latest multifamily housing starts data captures a significant decrease since last year with a 32% decline year over year in October.
On a qualitative level, we are also hearing of capital constraints (higher debt-service coverage ratios, lower loan-to-value ratios) affecting multifamily construction in addition to inflation and increased building costs. This slowdown in multifamily is backed by recent data from the AIA’s Architecture Billing Index, which shows that consulting engagements have declined, particularly for industrial and residential projects. This low read highlights a reduction in future growth plans.
Other firms have reported increasing vacancy rates for multifamily units as well as slowing rent growth. For example, Yardi Matrix data showed softening rent growth with monthly rents turning negative in many metropolitan areas as well as falling occupancy rates. With this additional data in mind, we expect that further softening to occur in the multifamily sector. In fact, our forecast of a 25% decline in multifamily starts in 2024 compared with 2023 appears conservative given the backdrop.
With the Federal Reserve’s next Federal Open Market Committee meeting Dec. 13, more information should come to light on whether credit will continue to tighten or if we have reached a plateau. This should then provide further information on housing conditions through next year.
