US Land Acquisition, Development, and Construction Financing Costs Increase in Q1

According to the recently released National Association of Home Builders (NAHB) Survey on Land Acquisition, Development & Construction (AD&C) Financing, AD&C tightened slightly and remained costly during Q1.

The net easing index derived from the survey posted a reading of negative 22.0 (the negative number indicating that credit availability tightened in Q1 when compared to 2023Q4), NAHB reported. A comparable net easing index based on the Federal Reserve’s survey of senior loan officers showed a similar result, with a reading of negative 24.6. Accordingly, borrowers and lenders were in close agreement about the tightening taking place in Q1.

According to the NAHB survey, the most common ways in which lenders tightened in the first quarter were by reducing the amount they are willing to lend, reported by 62% of builders and developers; and requiring personal guarantees/other collateral unrelated to the project and increasing interest rates, reported by 48% each.

As these results suggest, when builders and developers were able to obtain credit in Q1, that credit remained costly, NAHB said. The average effective interest rate (taking both the contract rate and initial points into account) on land acquisition loans increased from 10.58% to 11.09% in Q1, as high as the rate on acquisition loans has been since NAHB began tracking it in 2018. Meanwhile, the effective rate on the other three categories of AD&C loans in Q1 stood near 13%. The average effective rate increased on loans for land development from 11.25% in 2023Q4 to 13.10% in Q1, and speculative single-family construction increased from 12.96% to 13.35%, while declining from 15.65% to 12.95% on loans for pre-sold single-family construction.