Acquisition, Development, and Construction Financing Costs Climbed Higher in Q1

According to the recently released National Association of Home Builders (NAHB) quarterly Survey on Acquisition, Development, and Construction (AD&C) Financing, while mortgage rates were stabilizing during 2023Q1, rates on AD&C continued to climb higher.

From 2022Q4 to the end of 2023Q1, the average effective rate (based on rate of return to the lender over the assumed life of the loan taking both contract interest rate and initial fee into account) increased over all four categories of loans tracked in the AD&C Survey: from 10.14% to 11.09% on loans for land acquisition; from 10.41% to 11.88% on loans for land development; from 11.30% to 12.59% for speculative single-family construction; and from 10.85% to 12.01% on loans for pre-sold single-family construction. The NAHB notes that the effective rate was higher in 2023Q1 that it had been at any time since it began collecting data in 2018.

The NAHB AD&C Financing Survey also collects data on credit availability. To help readers interpret the data, the NAHB generates a net easing index, similar to the net easing index based on the Federal Reserve’s survey of senior loan officers. In 2023Q1, both the NAHB and the Fed indices were negative, indicating tightening in credit conditions. This marks the fifth consecutive quarter during which the indices from both surveys were in the negative. In 2022Q4, the NAHB net easing index stood at a negative 43.3 before increasing to a negative 36.0 in 2023Q1. Meanwhile, the Fed net easing index was negative 69.2 in 2022Q4, before dropping even lower to a negative 73.8 in 2023Q1.