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Construction Loans Slightly More Available, But at Higher Rates

BY PAUL EMRATH on NOVEMBER 19, 2021

In the third quarter of 2021, effective interest rates increased on all four categories of loans tracked in NAHB’s Survey on Acquisition, Development & Construction (AD&C). This result reverses a general downward trend that had prevailed since the third quarter of last year. In the third quarter 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) increased from 6.15 in the second quarter of 2021 to 6.50 percent in the third quarter of 2021 on loans for land acquisition, from 7.15 to 8.33 percent on loans for land development, from 8.09 to 8.55 percent on loans for pre-sold single-family construction, and from 7.40 to 8.37 percent on loans for speculative single-family construction.


Changes in the effective rate may be due to changes in either the contract interest rate, or in the initial points charged on the loan. On three categories of AD&C loans, the average contract rate and average points both increased in the third quarter. On land acquisition loans, the contract rate increased from 4.63 to 4.74 percent while the initial points increased from 0.69 to 0.88. On development loans, the contract rate increased from 4.63 to 4.74 percent while the points increased from 0.64 to 0.89. And on loans for pre-sold single-family construction, the contract rate increased from 4.32 to 4.49 percent while the points increased from 0.54 to 0.77. On the remaining category of AD&C loans (for speculative single-family construction) a reduction in the average contract rate—from 4.94 to 4.85 percent—was more than offset by a substantial increase in the initial points charged—from 0.66 to 0.87 percent.

The NAHB survey also produces a net easing index that summarizes the change in credit conditions on AD&C loans, similar to the net easing index constructed from the Federal Reserve’s survey of senior loan officers (SLOOS). In the third quarter of 2021, the NAHB and Fed indices were in close agreement with each other, both indicating a modest easing of credit. The NAHB index stood at 11.0 while the Fed index was 9.4. These results are quite similar to those from the second quarter, when the NAHB index was 9.7 and the Fed index was 7.0.


The NAHB net easing index uses information from questions that ask builders and developers if availability of credit has gotten better, worse, or stayed the same since the previous quarter. In the third quarter of 2021, 13 percent of the NAHB builders said availability of credit for land acquisition had gotten better, compared to 6 percent who said it had gotten worse. For land development, 14 percent said credit conditions improved, compared to 7 percent who said it had gotten worse. Finally, 21 percent of builders reported that the availability of credit for single-family construction had improved, compared to only two percent who said it had gotten worse.

Availability and rates on loans for residential development are of particular interest in the current environment, where home builders are experiencing record shortages of buildable lots.

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