The cost of construction loans has increased, as have the interest rates. Lenders are also less willing to lend money.
The Federal Reserve and NAHB both conducted surveys in the third quarter that revealed the same financial trend: credit conditions are tightening. The availability of residential land acquisition and development loans (AD&C) continued to decrease in the third quarter. Both the Fed and NAHB surveys produced negative results, showing that builders and lenders were “again in agreement” about credit tightening.
The NAHB Index posted a reading of -49.3, which is significantly below the -35.3 recorded in the second quarter. This was the most widespread report of tightening from builders since the Great Recession’s trough in 2010. Lenders reported tightening even more in the third quarter, with the Fed’s index of net easing posting a reading of -64.9, compared to -71.7 for the second quarter).
According to the NAHB survey, the most common way lenders tightened credit conditions during the third quarter was by increasing interest rates on loans (cited as the most common by 80% of builders and developers), reducing the amount they were willing to lend (57%), and lowering the allowed Loan-to Value or Loan-to Cost ratio (52%).
The cost of credit in the third quarter varied depending on whether you were a developer or a builder. The average contract rate for loans made specifically for single-family construction increased. It went from 8.37% to 8,66% when the building was speculative and from 8.18% – 8.37% when it was pre-sold. The average contract rate fell on loans for land purchase (from 8,62% to 8,31%) and land development (from 7,78 %).
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Housing Market Report
The housing market continues to be affected by affordability shocks, especially existing home sales. Mortgage rates were near 8% in October, and the monthly payment for many major markets in January 2022 was 60% more than it was in October.
We have seen that this low resell stock has pushed people to the new home market. Wolf explained that the resale stock is not just limited but also aging and costly. “New homes are usually more expensive than existing ones.” The price gap has been narrowing.”
Despite the dynamic supporting the new home market, builders share the impacts of “seasonality plus” in the field. Tim Sullivan, chief advisory officer at Zonda, said that builders surveyed were often referring to “scarce land,” expensive and undersupplied,” a “challenging environment” with high costs, “price-sensitive,” “cautious,” or “slowing and competitive.”
According to Sullivan’s research, builders are still enthusiastic about buying land, but it is getting more expensive. Zonda surveyed 43 percent of builders who said they were pursuing land acquisition “at full speed,” while 53 percent are moving cautiously. As land demand increases, so do prices. According to 40% of builders surveyed, land prices have increased.
Sullivan stated that affordability is becoming a greater concern for home builders. Consumer confidence, affordability of new homes, and economic uncertainty are all ranked as the top three concerns for builders. In October, 71% said that they had not raised prices, and an additional 13% had lowered the base price.
He noted that “flex dollars, money for closing costs and mortgage rate buydowns [have been effective incentives].” The builders target the sweet spot for buydowns, which is between mid-5 and mid-6.