Despite broader interest rate declines for government bonds and mortgages, NAHB industry survey data for the second quarter of 2019 indicates that interest rates for acquisition, development and construction (AD&C) remain stubbornly elevated. For example, loans for spec single-family home building averaged a 6.2% rate for the second quarter.
These higher interest rates have caused the volume of loans outstanding for building and development purposes to stall since the third quarter of 2018. After a slight dip at the end of 2018 and a small increase at the start of 2019, the volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined 0.7% during the second quarter. The volume of loans fell by $538 billion during the quarter, placing the total stock of loans at $79.7 billion.
On a year-over-year basis, the stock of residential construction loans is up just 3%, the lowest growth rate since the end of 2013. Since the first quarter of 2013, the stock of outstanding home building construction loans has nonetheless grown by 96%, an increase of $39 billion.
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 61% lower than the peak level of residential construction lending of $204 billion reached during the first quarter of 2008.
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 36% from peak lending. For the second quarter, these loans expanded by 1.5%.
As builder and developer lending slows down, a gap remains between the current volume of home building demand and available credit. This lending gap is being made up with other sources of capital, including equity, investments from non-FDIC insured institutions and lending from other private sources, which may in some cases offer less favorable terms for home builders than traditional AD&C loans.
This post brought to you by NAHB Eye on Housing.