Dive Brief:
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Financing standards for acquisition, development and single-family construction (AD&C) loans were looser — and easing at a faster rate — in Q1, according to the National Association of Home Builders' latest AD&C Financing Survey. The survey monitors quarterly fluctuations in residential construction loans held by banks.
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The index read a score of -25.0 in Q1, compared to -7.3 in Q4 2016 and -13.3 for Q1 2016. Greater negative readings indicate looser credit standards. Loan standards for land development and single-family construction eased fastest during the quarter, jumping 22 points and 24 points, respectively, from Q4 2016.
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Residential construction loans have been on a largely upward trend, with continued growth in Q1 as loan volume correlates with credit conditions.
Dive Insight:
Commercial banks continue to hold the largest share of AD&C credit. The survey's Q4 results revealed that 89% of builders and developers secured loans for land development from commercial banks. Another 84% turned to the source for single-family spec building and 79% for single-family pre-sold construction, according to the NAHB.
Still, the lending environment remains constricted. The volume of AD&C loans has been growing slowly since 2013, the NAHB reported. The 1.8% increase in residential construction loans in Q4 2016 marked the 15th-straight quarter of growth though that rate was the lowest since early 2013. Still, the residential sector saw a 14.3% rise in residential construction loan volume for the quarter, partly due to a “Trump bump” in industry optimism as well as to awareness of burgeoning demand to be recognized come spring.
In 2016, construction and development loans exceeded other categories in the commercial segment, raising a red flag for regulators who feared instigating another market downturn. The category likely benefited from confidence surrounding President Donald Trump's campaign for a massive infrastructure spend.
Construction lending could get a boost with a new bipartisan House bill that takes aim at a rule mortgage bankers say is stymying development. Instituted in January 2015, the Obama-era High Volatility Commercial Real Estate rule aims to prevent banks from doling out risky loans, such as those for construction financing. The bill's sponsors hope to make it easier for banks to back development projects, according to The Real Deal, by allowing developers to include their property's appraised value for the HVCRE’s 15% cash threshold, or to withdraw funds from the development if its value appreciates.