Banks Have Cut Lending to Homebuilders By 10%
This represents the biggest credit crunch for homebuilders in more than a decade.
A significant decrease in credit available to the residential construction segment may eventually impact the housing supply. Banks have cut lending for residential construction by more than 10%, from $102 billion a year ago to $92 billion at the end of the second quarter, according to an analysis in The Financial Times.
That represents the biggest credit crunch for homebuilders in more than a decade. Notably, construction lending has fallen for five consecutive quarters, according to data from the Federal Deposit Insurance Corp.
While slower lending hasn’t impacted supply yet, housing starts are on track to fall 16% this year, according to the analysis. Weak demand and a slow housing market could be factors. Prices are more likely to remain high if construction credit and supply remain constrained.
Housing affordability is a hot-button political topic across the country, as prices have continued to rise despite factors that should be exerting downward pressure on prices, such as higher mortgage rates. Supply shortages are likely keeping housing prices high, according to The Financial Times. Democratic presidential nominee Kamala Harris has proposed support including as much as $25,000 for down payments for first-time buyers, as well as tax credits for builders, the report said.
The challenges faced by regional banks that service homebuilder construction lending have been impacted by wider challenges in commercial real estate, including an oversupply of office space and falling valuations, the analysis said. US Bank, for example, has $3 billion in outstanding residential construction loans but $780 million in delinquent loans tied to commercial real estate, the analysis noted. Delinquent loans were up $140 million in the second quarter for the nation’s biggest lender to US homebuilders.
Many banks have tightened standards for construction loans, according to a Federal Reserve survey of 60 banks, none of which indicated they had increased credit to homebuilders or other real estate developers.