AD&C Lending for Home Building Remains Restrictive

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A number of economic indicators are pointing to improving days ahead for housing and home building. These include:

But while housing starts moved up in late 2011, lending for acquisition, development and construction (AD&C) loans for home building purposes continues to decline. While a substantial part of the reduction since 2008 represents the write downs of bad loans, it is also the case that the drop reflects restrictive lending practices for emerging housing demand.

According to Statistics of Banking data from the FDIC, the total stock of outstanding AD&C loans for 1-4 unit properties totaled $44.9 billion in the 4th quarter of 2011. This is 78 percent lower than the peak level of AD&C lending of $203.8 billion reached during the first quarter of 2008.

However, the quarterly declines for AD&C lending have been slowing. The fourth quarter total was 5.4 percent lower than the third quarter figure, which in turn was 6.7 percent lower than the second quarter of 2011. Before mid-2011, quarterly declines averaged about 10 percent.

Moreover, the constriction of home building AD&C lending exceeds that of other construction loans. All other AD&C lending are off 55.5 percent from the peak, compared to the nearly 80 percent decline for home building.

While consistent with NAHB surveys of home builders regarding the availability of credit, these data from the FDIC are somewhat at odds with the Senior Loan Office Survey reporting from the Federal Reserve. In general, the Fed survey data indicate that the days of credit tightening, as reported by lending institutions, have come to an end.

For example, the Fed survey results suggest that net tightening for home buyer mortgage lending generally ended in 2011, which is consistent with the FDIC data on total residential mortgage debt, which has been relatively flat over the last two years.

However, the Fed survey data for commercial real estate lending indicates no net tightening since late 2010. This is in contradiction to the FDIC data for AD&C purposes which indicate that outstanding loan totals continue to decline.

More fundamentally, a lending gap has opened between home building demand and available credit. Since the beginning of 2007, the dollar value of single-family permitted construction has fallen 58 percent. During this same period, home building lending for AD&C purposes is down 77 percent.

This lending gap is holding back home building from contributing to a robust economic recovery in areas where demand for new homes is growing.

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