Interest Rates on 3 out of 4 Acquisitions, Development, and Construction Financing Loans Declined in Q2

According to the latest National Association of Home Builders (NAHB) Survey on Acquisitions, Development, & Construction (AD&C) Financing, in Q2 of 2021 interest rates on three of the four categories monitored continued on their downward trend that stated in Q3 of 2020. The average effective rate (based on rate of return to the lender over the assumed life of the loan taking both the contract interest rate and initial fee into account) decreased from 6.38% in Q1 of 2021 to 6.15% in Q2 of 2021, on loans for land acquisition, from 7.30% to 7.15% on loans for land development, and from 7.61% to 7.40% on loans for pre-sold single-family construction. The outlier was the effective rate on loans for speculative single-family construction, which increased from 7.31% to 8.09%.

The NAHB survey also produces a net easing index that summarizes the change in credit conditions on AD&C loans. In Q2 of 2021, the NAHB index still showed credit conditions were easing (9.7) but to a lesser degree than in the Q1 of 2021 (12.7). Meanwhile, a similar index constructed from the Federal Reserve’s survey of senior loan officers (SLOOS) showed easing of credit in Q2 of 2021 (7.0), compared to the tightening shown in Q1 of 2021 (-14.3). This was the first time the Fed index reported easier credit conditions since the first quarter of 2015. With both the NAHB and Fed measures showing modest easing, this is the closest the two indexes have come to agreeing with each other since tracking began in 2009.