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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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In Research & Trends

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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Home Sizes: Demand versus Supply

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The share of new single-family homes built in the 1,600-3,000 square-foot range closely matches the share of buyers who want homes of that size, according to recent surveys from NAHB and the U.S. Census Bureau. The surveys show that 21% of buyers want homes with 1,600 to 1,999 square feet, and 22% of new single-family homes started in 2023 have that much floor space. In the next tier up, 38% of buyers want homes with 2,000 to 2,999 square feet, and 40% of new single-family homes fall within that size range.

Results on the square footage buyers want in their next home were published in the 2024 edition of What Home Buyers Really Want, based on a representative sample of 3,008 recent and prospective home buyers conducted in 2023. The size of homes started comes from NAHB tabulation of the recently released 2023 data file from the Census Bureau’s Survey of Construction.

Outside of the 1,600-3,000 square-foot range, the match between what buyers want and what builders provide is not as close. While 26% of buyers want homes under 1,600 square feet, only 16% of single-family homes started in 2023 were that small. And while 22% of new homes have at least 3,000 square feet, only 14% of buyers are looking for homes that large.

Part of the reason for the apparent mismatch, of course, is that builders are compensating for the existing stock of housing, much of which was built decades ago when homes tended to be smaller. According to the latest American Housing Survey (funded by HUD and conducted in odd-numbered years by the Census Bureau), a full one-third of existing homes in the U.S. have less than 1,500 square feet of floor space. Moreover, the median size of an existing single-family detached home is 1,800 square feet, compared to 2,200 square feet for single-family homes started in 2023 and the 2,067 square feet that home buyers say they want in the NAHB survey.

In other words, the median buyer wants a home that is 133 square feet smaller than the median new single-family home, but still 267 square feet larger than the median existing single-family detached home.

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