Loan Rates for Development and Construction Continued to Decline in Q1 of 2021

According to builders and developers responding to the National Association of Builder’s Survey on Acquisition, Development & Construction (AD&C) Financing continued to report declining interest rates in Q1 of 2021. 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 7.27% to 6.38% in Q4 of 2020 on loans for land acquisition, from 7.40% to 7.30% on loans for land development, from 7.87% to 7.31% on loans for speculative single-family construction, and from 8.73% to 7.61% on loans for pre-sold single-family construction. The effective rate has now declined for two consecutive quarters in all cases except on loans for land acquisition, where it remained constant between the third and fourth quarters before declining at the beginning of 2021. The average effective rates on land development and pre-sold single-family construction remain above their second quarter 2020 troughs, while the effective rates on land development and speculative single-family construction established new post-2018 lows in 2021:Q1. The NAHB survey also produces a net easing index that summarizes the change in credit conditions on AD&C loans. In the first quarter of 2021, the NAHB index still showed that credit conditions were easing (12.7), but to a lesser degree than in the fourth quarter of 2020 (17.0). Meanwhile, a similar index constructed from the Federal Reserve’s Senior Loan Officers Opinion Survey (SLOOS) showed net tightening (negative easing) of credit in the first quarter of 2021 (-14.3), but to a lesser extent than in the fourth quarter of 2020 (-26.1).

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Rates on Development & Construction Loans Continue to Decline