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Residential Construction Loan Volumes Decline Over the Third Quarter

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The total volume of outstanding acquisition, development, and construction (AD&C) loans made by FDIC-insured institutions fell for the third consecutive quarter during the third quarter of 2024 to a volume of $490.7 billion, down from $495.8 billion in the second quarter. Interest rates remained higher over the third quarter, as the Fed issued its first rate cut at the end of the quarter in September. Future AD&C lending conditions are poised to improve as the Fed continues its easing cycle over the next year despite potential headwinds of higher Government deficits and economic uncertainty.

The volume of 1-4 family residential construction and land development loans totaled $90.8 billion in the third quarter, down 8.4% from one year ago. This year-over-year decline marked the fifth straight quarter where the total volume of outstanding loans declined compared to a year prior. All other real estate development loans totaled $399.9 billion in the third quarter, down $4.3 billion from the previous quarter.

It is worth noting, the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing 1-4 family residential AD&C loans now stands 55% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years.

While the volume of 1-4 family residential AD&C loans fell during the third quarter, the volume of past due and nonaccrual residential AD&C loans rose above $1 billion for the first time since 2014. A majority of this outstanding total was made up of loans in nonaccrual status (typically a loan where the lender does not expect to receive payment) which totaled $505.9 million. The outstanding loan balance for those 30-89 days past due was $491.5 million and loans 90 days or more past due totaled $65.4 million. As a share of the total outstanding stock of 1-4 family residential AD&C loans ($90.8 billion), past due and nonaccrual loans ($1.0 billion) made up 1.2% of the outstanding stock of loans.

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Credit Still Tight, But Builders Finally Get Some Relief from Interest Rates

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In the third quarter of 2024, borrowers and lenders agreed, as they have over most of the past three years, that credit for residential Land Acquisition, Development & Construction (AD&C) tightened. On the borrower’s side, the net easing index from NAHB’s survey on AD&C Financing posted a reading of -12.0 (the negative number indicates credit was tighter than in the previous quarter). On the lender’s side, the comparable net easing index based on the Federal Reserve’s survey of senior loan officers posted a similar reading of -14.8.  Although the additional net tightening was relatively mild in the third quarter (as indicated by negative numbers that were smaller, in absolute terms, than they had been at any time since 2022 Q1), both surveys indicate that credit has tightened for eleven consecutive quarters—so credit for AD&C must now be significantly tighter than it was in 2021.   

According to  NAHB’s survey, the most common ways in which lenders tightened in the third quarter were by lowering the loan-to-value (or loan-to-cost) ratio, and requiring personal guarantees or collateral not related to the project—each reported by 61% of builders and developers. After those two, reducing the amount lenders are willing to lend was in the third place, with 56%.

Additional information from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—is discussed in an earlier post.

Although the availability of credit for residential AD&C was tighter in the third quarter, builders and developers finally got some relief from the elevated cost of credit that has prevailed recently. In the third quarter, the contract interest rate decreased on all four categories of AD&C loans tracked in the NAHB survey. The average rate declined from 9.28% in 2024 Q2 to 8.50% on loans for land acquisition, from 9.05% to 8.83% on loans for land development, from 8.98% to 8.54% on loans for speculative single-family construction, and from 8.55% to 8.11% on loans for pre-sold single-family construction.

More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page.

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Residential Mortgages Experience Unchanged Lending Conditions, Weaker Demand in Third

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Lending standards were essentially unchanged for all residential mortgage categories in the third quarter of 2024, except for Subprime loans, according to the Federal Reserve Board’s October 2024 Senior Loan Officer Opinion Survey (SLOOS).  Demand for most residential mortgage loans remained weaker across all categories in the quarter.  Lending conditions for commercial real estate (CRE) loans were moderately tight, amid modestly weak demand as well.  However, NAHB believes that financial conditions for the home building industry should improve next year as the Federal Reserve continues along their current rate cutting cycle.

Residential Mortgages

GSE-eligible and Qualified Mortgage (QM) non-jumbo non-GSE eligible mortgages recorded a neutral net easing index value (i.e., 0) while the other five residential mortgage loan types (Subprime, Non-QM jumbo, QM jumbo, Non-QM non-jumbo, Government) were negative for the third quarter of 2024, representing tightening conditions.

Besides GSE-eligible, which posted stronger demand (i.e., positive value) for the first time since Q2 2021, and QM non-jumbo non-GSE eligible (neutral demand), all other residential mortgage loan categories reported weaker demand in Q3 2024. Weakness is less widespread than in recent quarters, however. Among all residential mortgage loan categories, falling demand is best highlighted by Subprime loans which  experienced weaker demand for 17 consecutive quarters, or for over four years.

Commercial Real Estate (CRE) Loans

Banks reported moderately tightening lending conditions for both multifamily as well as all CRE construction & development loans in the third quarter of 2024.  However, the tightening was not as widespread as in recent quarters. Results show 10 consecutive quarters of tightening lending conditions for CRE loans.

For multifamily, the net percentage of banks reporting stronger demand was -8.2% while –14.8% for construction & development loans.  Although improving, weaker demand has continued for over two years for both CRE loan categories.

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Declines for Residential Construction Loans

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During the second quarter of 2024, the volume of total outstanding acquisition, development and construction (AD&C) loans posted the largest year-over-year percentage decline since 2012, as interest rates remain elevated before the beginning of the Fed cutting short-term interest rates in September. AD&C loan conditions will improve as the Fed progresses in its policy easing cycle.

The volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined 3.5% during the second quarter. The outstanding stock of loans declined by $3.3 billion for the quarter. This loan volume retreat places the total stock of home building construction loans at $92 billion, off a post-Great Recession high set during the first quarter of 2023 ($105 billion). The decline in loan volume is holding back private builder home construction and acting as a limiting factor for home builder sentiment.

On a year-over-year basis, the stock of residential construction loans is down more than 10%, the largest year-over-year decline since 2012. This contraction for construction financing is a key reason home builder sentiment moved lower at the end of 2023, even as building activity accelerated, propelled by larger builder activity.

It is worth noting the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 55% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years.

The FDIC data reveal that the total decline from peak lending for home building construction loans continues to exceed that of other AD&C loans (nonresidential, land development, and multifamily). Such forms of AD&C lending are off a smaller 7% from peak lending. For the second quarter, the outstanding stock of these loans was approximately unchanged.

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Credit for Builders: Rates Up, Availability Down in the Second Quarter

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During the second quarter of 2024, credit for residential Land Acquisition, Development & Construction (AD&C) continued to tighten and became even more expensive for most types of loans, according to NAHB’s survey on AD&C Financing. The survey was conducted in July and asked specifically about financing conditions in the second quarter, predating the release of some relatively weak economic data that has raised prospects for monetary policy easing.

The net easing index derived from the survey posted a reading of -33.7 in the second quarter (the negative number indicating that credit was tighter than in the previous quarter). The comparable net easing index based on the Federal Reserve’s survey of senior loan officers posted a similar result, with a reading of -23.8—marking the tenth consecutive quarter of borrowers and lenders both reporting tightening credit conditions.

According to the NAHB survey, the most common ways in which lenders tightened in the second quarter were by reducing the amount they are willing to lend, and by lowering the loan-to-value (or loan-to-cost) ratio, each reported by 85% of builders and developers. After those two ways of tightening, three others tied for third place: increasing documentation, increasing the interest rate, and requiring personal guarantees or other collateral unrelated to the project, each reported by exactly half of the borrowers.

As is often the case, as credit becomes less available it also tends to become more expensive. In the second quarter, the contract interest rate increased on all four categories of AD&C loans tracked in the NAHB survey: from 8.40% in 2024 Q1 to 9.28% on loans for land acquisition, from 8.07% to 9.05% on loans for land development, from 8.24% to 8.98% on loans for speculative single-family construction, and from 8.38% to 8.55% on loans for pre-sold single-family construction.

In addition to the contract rate, initial points charged on the loans can be an important component of the overall cost of credit, especially for loans paid off as quickly as typical single-family construction loans. Trends on average initial points were mixed in the second quarter. The average charge on loans for land acquisition was unchanged at 0.88%. The average declined from 0.85% to 0.70% on loans for land development, and from 0.57% to 0.47% on loans for pre-sold single-family construction. On the other hand, on loans for speculative single-family construction, average initial points increased from 0.76% to 0.89%.

Irrespective of changes in points, increases in the underlying contract rate were sufficient to drive up the average effective interest rate (calculated taking both contract rate and initial points into account), on three of the four categories of AD&C loans in the second quarter. The average effective rate increased from 11.09% to 12.22% on loans for land acquisition, from 13.35% to 14.32% on loans for speculative single-family construction, and from 12.95% to 13.08% on loans for pre-sold single-family construction. Meanwhile, the average effective rate declined on loans for land development—from 13.10% in 2024 Q1 to 12.93%.

The average effective rates on loans for land acquisition and speculative single-family construction in the second quarter of 2024 were the highest they’ve been since NAHB began collecting the information in 2018. However, there’s a reasonable chance the situation will improve in the third and fourth quarters, as the Federal Reserve has begun signaling its intent to cut rates later this year.

More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page.

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Unchanged Lending Conditions, But Weaker Demand for Residential Loans in Second Quarter

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According to the Federal Reserve Board’s July 2024 Senior Loan Officer Opinion Survey (SLOOS), lending standards were essentially unchanged for all residential real estate (RRE) categories in the second quarter of 2024.  However, demand for RRE loans remained modestly weaker across all categories in the quarter.  Lending conditions were significantly tighter, and loan demand modestly was weaker across all commercial real estate (CRE) loan categories.  Nevertheless, language from the most recent Federal Open Market Committee (FOMC) suggest that cuts to the federal funds rate are imminent which will be welcomed relief for the real estate market and will help stimulate future loan activity.

Residential Real Estate (RRE)

Four of the seven RRE categories (GSE-eligible, non-Qualified Mortgage or QM jumbo, Non-QM non-jumbo, and Subprime)recorded a net share of banks reported tighter lending standards in Q2 2024 as neutral (i.e., 0%) . The other three categories, which included government (i.e., issued by FHFA, Department of Veteran Affairs, USDA, etc.), QM jumbo, and QM non-jumbo non-GSE eligible recorded a negative reading which means that more banks reported looser rather than tighter conditions.

Six of the seven categories of RRE loans showed a decrease in net tightening from Q1 2024 to Q2 2024, with the only exception being GSE-eligible which increased 1.8 percentage points.  The largest drop in the net tightening percentage occurred for Non-QM jumbo which fell 9.8 percentage points (pp) from 9.8% in Q1 2024 to 0% in Q2 2024.

All RRE categories reported net weaker demand in Q2 2024.  The survey has shown that banks have indicated weaker demand for at least 12 consecutive quarters for all RRE categories going back to Q2 2021 (Subprime leads all RRE categories at 16 consecutive quarters).

Commercial Real Estate (CRE)

Banks reported significantly tighter lending conditions for both multifamily as well as all CRE construction & development loans in Q2 2024.  However, both categories showed less net tightening than they did a quarter before, most noticeably multifamily falling 11.7 percentage points.  Nevertheless, it has been 10 consecutive quarters of tighter lending conditions for construction & development and 9 consecutive quarters for multifamily.

For multifamily, 17.5% of banks reported net weakening of demand for loans which is 16.4 percentage points lower compared to Q1 2024.  As for construction & development loans, 15.9% of banks reported net weakening of demand for loans which was little changed from the previous quarter.  Weaker demand has persisted for roughly the last two years for construction & development (10 consecutive quarters) and multifamily (8 consecutive quarters).

Special Questions

The Federal Reserve included a set of special questions this quarter which asked banks “to describe the current level of lending standards at your bank relative to the range of standards that has prevailed between 2005 and the present.”  Effectively, they are asking banks to think about the median lending standards over the last two decades and determine where do conditions today rank on this continuum.  On balance, banks indicated that the current level of lending standards is located at the tighter end of this range for all loan categories, including CRE and RRE loans.

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