Homebuilder credit tightens again, according to two surveys

As they see potential challenges looming from international tariffs, homebuilders are also facing ongoing credit tightening that has so far lasted for three years.

Credit conditions for residential land acquisition, development and construction tightened in the fourth quarter, according to indices from both the National Association of Home Builders and the Federal Reserve. Both indices came in lower for the twelfth consecutive quarter. 

From October to December, NAHB's index tracking financing available to members came in with a score of -16.3, with negative numbers indicative of declining credit offerings. At the same time, a survey of senior loan officers conducted by the Federal Reserve led to a reading of -9.5 in its index. 

In NAHB's results, builders were most likely to see lower loan-to-value or loan-to-cost ratios as reported by 72% of survey respondents. A majority of 61% also said they saw a reduction in amounts offered. 

Broken down by category, the share of builders who reported tightening credit for single-family construction costs increased from 11% to 16% between third and fourth quarters last year, while only 10% found it had improved.  

For land acquisition, 28% reported less availability, up from 20% in the third quarter. Only a negligible share reported stronger credit conditions. 

On the other hand, fewer builders reported tightening for land development loans quarter over quarter with the share falling to 21% from 26%. Seven percent also noted credit availability had risen.

Average contract interest rates declined across the board, though, for all categories, finishing the quarter between 7.75% for loans on pre-sold single-family construction to 8.48% for land acquisition. Effective rates, with points factored in, presented a mixed picture, finishing lower for land development acquisition purposes but higher for construction. 

In spite of credit conditions, the outlook for builders gradually improved since late summer, according to NAHB's gauge of industry sentiment, with the trade group's members reporting favorable opportunities for sales. 

The most recent sentiment numbers came out prior to the inauguration of the new president. Homebuilders, along with businesses in several other industries, are now encountering a period of heightened uncertainty following President Trump's new policy proposals during his first few weeks in office, particularly surrounding international tariffs. 

Following Trump's announcement of tariffs on goods coming from Canada and Mexico, as well as a subsequent import tax for all aluminum and steel imports, the NAHB expressed serious concerns that the moves would slow domestic residential construction and raise prices for builders and consumers. 

The next release of NAHB's housing market index is scheduled for Feb. 18.