June 10, 2024
mwoolley_specialevents@tbba.net
Home builders’ ability to borrow money for acquisition, development and construction grew more difficult in the first quarter of 2024, but experts continue to believe AD&C loan conditions will improve when the federal government decreases interest rates later this year.
According to the National Association of Home Builders, the volume of 1-4 unit residential construction loans made by FDIC-insured institutions declined 2% during the first quarter. The outstanding stock of loans declined by $1.9 billion for the quarter. The tightening continues a trend that started after the first quarter of 2023.
“This loan volume retreat places the total stock of home building construction loans at $95 billion, off a post-Great Recession high set during the first quarter of 2023 ($105 billion),” stated the NAHB report. “The decline in loan volume is holding back private builder housing construction and acting as a break on home builder sentiment.”
As the LBM (Lumber & Building Materials) Journal notes, observers have targeted higher mortgage rates as a primary factor decreasing housing affordability. It also noted however, that decreasing access to AD&C loans dents the ability of home builders to increase housing stock.
“Builders and developers will struggle to increase the supply of affordable housing unless they can access all the necessary inputs at a reasonable cost, including AD&C credit,” wrote the LBM journal.
Help for builders and developers may be on the way if the Federal Reserve reduces interest rates, especially the federal funds rate. The higher the federal funds rate, the more expensive it is for companies to borrow money. A lower rate will bring down short-term interest rates and loosen up dollars. If and when that happens remains the source of great speculation.
The Federal Reserve meets June 11-12, but it’s not expected to cut rates. Fed Reserve chair Jerome Powell has repeatedly stated inflation growth must be reduced to 2% before the Reserve would likely enact an interest rate cut. In May, Powell said the current inflation rate of 3.4% will likely lead to the reserve maintaining the interest rate at 5.25% to 5.50%.
However, other central banks have reduced rates and that has created speculation the Fed Reserve will follow suit. The European Central Bank, the Bank of Canada and banks in Sweden and Switzerland have all trimmed rates this year.
The Street’s Charley Blaine recently wrote that central bank rate cuts around the globe will put pressure on the Fed to make a cut at its September meeting.
A Reuters poll of economic forecasters also predicted a cut will come in September and a second cut will occur before the end of 2024. A Bloomberg story has Citi officials predicting a cut in September while JP Morgan believes it won’t occur until November.
Visit the NAHB’s report on declining AD&C loans to learn more about the trend.