Growth in construction lending may ease builders' supply chain problems

This blog has previously looked at some of the supply chain problems facing American builders. These issues, which include shortages of skilled laborers and usable land, can affect the cost of repairing or replacing existing structures. However, the Wall Street Journal recently examined a recovery in construction lending that could help ease the pressure on builders.

Market remains far below pre-recession peak

In the wake of the 2008 financial crisis, the amount of outstanding construction loans declined rapidly from a high point of more than $600 billion. By the first quarter of 2013, the total had dropped to $201.5 billion. Since then, the market has started a gradual recovery.

An August 28 report from the Federal Deposit Insurance Corporation indicated that outstanding construction loans exceeded $223 billion during the second quarter, up 4 percent from Q1. This was the largest quarterly increase since the recovery began, which may be a sign that builders will continue to enjoy expanding access to credit as confidence in the economy improves.

The relatively strong increase in construction lending came in the context of a banner quarter for the U.S. banking sector. The FDIC found that banks' loan and lease balances jumped 2.3 percent during Q2, the largest quarterly increase since 2007. This pushed the total above $8 trillion for the first time. Centennial Bank CEO J. David Williams told the Journal that he is seeing "more consistent, steady growth instead of peaks and valleys."

Residential segment outpaces broader construction market in loan growth

Lending for residential construction improved slightly more than the overall market for building loans, rising 5.4 percent during the second quarter. Scott Laurie, CEO of a California-based construction firm aiming to build 225 homes this year, told the Journal it is currently "the best it has been to be borrowing and building since the recovery started."

Nonetheless, many companies continue to face obstacles. Ohio builder Robert Myers said that financing remains harder to obtain for smaller firms, in part due to banks' concerns about "regulatory friction." We've previously discussed financiers' tendency to focus on high value development in both conventional housing and condos. However, several prominent construction firms, including the nation's largest home builder, have bucked the trend by launching new brands that feature moderately priced single family homes as their flagship product.

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