Credit for Residential Land Acquisition, Development, and Construction Tightens in Q2

According to the National Association of Home Builders (NAHB) survey on residential Land Acquisition, Development, and Construction (AD&C) Financing, credit for residential AD&C continued to tighten in Q2 and became even more expensive for most types of loans. The survey was conducted in July and asked specifically about financing conditions in Q2, predating the release of some relatively weak economic data that has raised prospects for monetary policy easing, NAHB said.

The net easing index derived from the survey posted a reading of a negative 33.7 in Q2 (the negative number indicating 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 a negative 23.8—marking the tenth consecutive quarter of borrowers and lenders both reporting tightening credit conditions.

The most common ways in which lenders tightened in Q2 were by reducing the amount they are willing to lend, and by lowering the loan-to-value (or loan-to-cost) ratio, each reported by 85% of builders and developers. After those two ways of tightening, three others tied for third place: increasing documentation, increasing the interest rate, and requiring personal guarantees or other collateral unrelated to the project—each reported by exactly half of the borrowers.

As is often the case, as credit becomes less available it also tends to become more expensive, NAHB said. In Q2, the contract interest rate increased on all four categories of AD&C loans tracked in the NAHB survey: from 8.40% in 2024 Q1 to 9.28% on loans for land acquisition, from 8.07% to 9.05% on loans for land development, from 8.24% to 8.98% on loans for speculative single-family construction, and from 8.38% to 8.55% on loans for pre-sold single-family construction.

The average effective rates on loans for land acquisition and speculative single-family construction in Q2 were the highest they’ve been since NAHB began collecting the information in 2018. However, there’s a reasonable chance the situation will improve in Q3 and Q4, as the Federal Reserve has begun signaling its intent to cut rates later this year.