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Financing conditions have become increasingly challenging for residential builders. According to a recent survey from the National Association of Home Builders, credit for residential Land Acquisition, Development & Construction (AD&C) continued to tighten and became more expensive during Q2 2024. The survey revealed that lenders are limiting the amount they are willing to lend and lowering loan-to-value ratios, making it more difficult and costly for builders to secure financing. As credit conditions tighten, interest rates on AD&C loans are rising across all categories. In fact, in Q2 2024, the average rates on loans for land acquisition and speculative single-family construction were the highest they’ve ever been since 2018.
As is often the case, as credit becomes less available it also tends to become more expensive. In the second quarter, the contract interest rate increased on all four categories of AD&C loans tracked in the NAHB survey: from 8.40% in 2024 Q1 to 9.28% on loans for land acquisition, from 8.07% to 9.05% on loans for land development, from 8.24% to 8.98% on loans for speculative single-family construction, and from 8.38% to 8.55% on loans for pre-sold single-family construction.
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