Interest Rates for AD&C Loans Rise, Bucking Trends

Interest rates on loans for land acquisition, development, and single-family construction (AD&C) continued to rise in the second quarter of 2019, despite other rates seeing consistent declines, the National Association of Home Builders reports.

As the survey showed, relationships among the various subcategories of AD&C loans remained about the same, with the highest average interest rate—6.59 percent—recorded on loans for land acquisition loans, followed by 6.49 percent on loans for land development, 6.21 percent on loans for speculative single-family construction, and 5.97 percent on loans for pre-sold single-family construction.  In each case, the average rate in the second quarter of 2019 was higher than in either the first quarter of 2019 or the fourth quarter of 2018.  With the exception of loans for land acquisition, the average interest rate was the highest it’s been since the start of 2018, when NAHB began collecting the information (Exhibit 8).  The upward trend in interest rates on AD&C loans in 2019 occurred while the Federal Reserve’s target federal funds rate remained stable and mortgage rates were generally trending downward.

A higher interest rate on the outstanding balance drawn against an AD&C loan can, potentially, be offset by reducing points charged on the initial loan commitment.  Recently, in fact, loans for single-family construction have shown this tendency.  In the second quarter, average points on loans for speculative single-family construction declined from 79 to 71 basis points, and on loans for pre-sold single-family construction from 65 to 45 basis points—in both cases the lowest they’ve been since NAHB began collecting the information in the first quarter of 2018.  Meanwhile, the second-quarter averages of 99 basis points on loans for land acquisition and 103 on loans for land development remained at or near their post-2017 peaks.

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