Tightened Credit for Builders in Q2

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 indicates 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 10th consecutive quarter of borrowers and lenders both reporting tightening credit conditions.

According to the NAHB survey, the majority (85%) of respondents noted that lenders were tightening in the second quarter by:

• Reducing the amount they are willing to lend, and
• Lowering the loan-to-value (or loan-to-cost) ratio.

Half of respondents also reported tightening by increasing documentation, increasing the interest rate, and requiring personal guarantees or other collateral unrelated to the project.

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:

• 8.40% in 2024 Q1 to 9.28% on loans for land acquisition,
• 8.07% to 9.05% on loans for land development,
• 8.24% to 8.98% on loans for speculative single-family construction, and
• 8.38% to 8.55% on loans for pre-sold single-family construction.

Paul Emrath, NAHB vice president for survey and housing policy, provides further insights in this Eye on Housing post.