US Residential Acquisition, Development, and Construction Loans Decline in Q2

A National Association of Home Builders (NAHB) analysis of FDIC data shows the volume of total outstanding acquisition, development, and construction (AD&C) loans during Q2 posted the largest year-over-year percentage decline since 2012. This was the result of interest rates remaining elevated prior to the beginning of the Fed cutting short-term interest rates in September, NAHB said.

NAHB analysis reveals that the volume of 1–4-unit residential construction loans made by FDIC-insured institutions declined 3.5% during Q2. The outstanding stock of loans declined by $3.3 billion for the quarter. This loan volume retreat places the total stock of home building construction loans at $92 billion, off a post-Great Recession high of $105 billion during 2023Q1. The decline in loan volume is holding back private builder home construction and acting as a limiting factor for home builder sentiment.

On a year-over-year basis, the stock of residential construction loans is down more than 10%, the largest year-over-year decline since 2012. This contraction for construction financing is a key reason home builder sentiment moved lower at the end of 2023, even as building activity accelerated, propelled by larger builder activity.

Finally, NAHB notes that the FDIC data represent only the stock of loans, not changes in the underlying flows, so it is an imperfect data source. Lending remains much reduced from years past. The current amount of existing residential AD&C loans now stands 55% lower than the peak level of residential construction lending of $204 billion reached during 2008Q1. Alternative sources of financing, including equity partners, have supplemented this capital market in recent years.