US homebuilders are experiencing the most significant credit crunch in over a decade, with banks reducing lending for residential construction by more than 10%.
As of the end of June, US banks had $92 billion in loans outstanding for the construction of homes designed for one to four families, down from $102 billion a year earlier. This year-on-year decline is the largest in more than a decade, according to an analysis by BankRegData of the latest data from the Federal Deposit Insurance Corp. Moreover, this marks the fifth consecutive quarter of reduced lending for home construction.
Cris deRitis, deputy chief economist at Moody’s Analytics, noted that while the impact on housing supply might not be immediately evident, given that many homes are already under construction, prolonged credit tightness will likely affect builders over time. Government data indicates that housing starts are on track to decline by 16% this year.
DeRitis suggested that the slowdown in lending might be partly due to weak demand stemming from a sluggish housing market. However, if interest rates decrease, sales could potentially rebound. Nevertheless, a lack of construction credit would constrain supply, likely keeping prices high.
Housing affordability has become a pressing economic and political issue in the US, as prices continue to rise despite several years of elevated mortgage rates, driven in part by supply shortages.
Democratic presidential nominee Kamala Harris has proposed measures to address this issue, including up to $25,000 in down payment assistance for first-time buyers and tax credits for builders.
Regional banks, which often specialise in lending to homebuilders, have been severely impacted by broader challenges in the commercial real estate market, including an oversupply of office space and declining property valuations.
US Bank, the largest lender to homebuilders in the country, currently has $3 billion in outstanding residential construction loans. The bank also has $780 million in delinquent loans tied to commercial real estate, a figure that rose by $140 million in the second quarter alone.
While the FDIC data doesn’t specify whether the decline in lending is due to reduced credit availability from banks or lower demand from homebuilders, a Federal Reserve survey of over 60 banks revealed that about one-third had tightened standards for construction loans. None of the banks reported increasing credit to home or other real estate developers.