Credit became tighter and most costly on loans for Acquisition, Development, and Construction (AD&C) in the second quarter, according to NAHB’s survey on AD&C financing. The average effective rate—based on the rate of return to the lender over the assumed life of the loan taking both the contract interest rate and initial fee into account—increased “substantially” from the first quarter for loans for land acquisition, land development, speculative single-family construction, and pre-sold single-family construction.
Changes in the effective rate may be due to changes in either the contract interest rate, or in the initial points charged on the loans. In the second quarter, average points were unchanged from the previous quarter at 0.63% on loans for speculative single-family construction, and actually down slightly on the other three categories of AD&C loans: from 0.90 to 0.86% on loans for land acquisition, from 0.95 to 0.90% on loans for land development, and from 0.63 to 0.51% on loans for pre-sold single-family construction. However, these relatively small changes were overshadowed by strong surges in the average contract interest rate changed on the loans: from 4.36 to 6.19% on loans for land acquisition, from 4.60 to 6.27% on loans for land development, from 4.63 to 5.39% on loans for speculative single-family construction, and from 4.61 to 5.24% on loans for pre-sold single-family construction.
The NAHB survey also produces a net easing index that summarizes the change in credit conditions, similar to the net easing index constructed from the Federal Reserve’s survey of senior loan officers (SLOOS). The second quarter of 2022 was the second consecutive quarter during which both the NAHB and Fed indices were negative, indicating tightening credit conditions. Moreover, both indices were substantially more negative in the second quarter than they had been in the first. In the second quarter, the NAHB net easing index stood at -21.0 while the Fed index was -48.4—compared to -2.30 and -4.7, respectively, in the first quarter of 2022.
