Credit for residential builders tightened in the second quarter of 2024, rendering the construction of single-family homes more expensive.
A July survey by the National Association of Home Builders (NAHB) of residential Land Acquisition, Development & Construction (AD&C) resulted in a net easing index reading of -33.7 in Q2, a negative number indicating that credit was tighter than the previous quarter.
The survey on AD&C financing asked specifically about financing conditions in the second quarter – predating more recent economic data that has raised prospects for monetary policy easing.
A comparable survey of senior loan officers by the Federal Reserve posted a similar result, with a reading of -23.8. This marked the tenth consecutive quarter of tightening lending conditions as reported by borrowers and lenders.
“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,” NAHB Vice President for Survey and Housing Policy Research Dr. Paul Emrath said. “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.”
The most common ways in which lenders tightened credit in Q2 were by reducing eligible loan amounts and lowering the loan-to-value ratio – both reported by 85% of builders and developers.
The third most common tightening mechanism was increasing documentation, increasing interest rates, and requiring personal guarantees or other collateral unrelated to the project – reported by 50% of those surveyed.
“As is often the case, as credit becomes less available it also tends to become more expensive," Emrath noted, pointing out that the contract interest rate on all four categories of AD&C loans increased in the second quarter.
On land acquisition loans, rates rose from 8.4% in Q1 to 9.28%; land development – from 8.07% to 9.05%; speculative single-family construction – 8.24% to 8.98%, and pre-sold single-family construction – from 8.38% to 8.55%.
