Rebuilding Construction Loans
The disintegration of construction and development loan portfolios echoed a collapse in home building and paralleled a dive in other private construction activity. Now, construction spending may be bottoming out.
Overall in the current cycle, housing construction has failed to fill the role it had in fueling previous recoveries. Change in housing starts, months before and after recession end. (Figures are based on three-month moving averages of values at a seasonally adjusted annual rate)
Housing starts have begun to tick up, however, with recent gains concentrated in the multifamily sector, perhaps reflecting a shift toward renting as a result of the foreclosure crisis. Units in thousands.
Construction and development loans are most important to smaller banks. Such assets accounted for about 7% of total loans at institutions with less than $10 billion of assets as of Sept. 30, compared with just 2% at institutions with more than $100 billion of assets. Construction and development loan portfolios by bank asset class
Banks have reported loosening standards for commercial real estate loans - which included construction and development loans - for four consecutive quarters, and that demand has spiked recently.
Construction and development portfolios have by far the worst nonperformance ratios of any major loan category, however, and chargeoffs are likely to remain a severe headwind. Noncurrent to total construction and development loans by bank asset class
Construction and development loans also account for the largest category of repossessed assets on bank books.
Ultimately, lending volume will be determined by broad supply and demand factors in the housing market. Household formation* turned sharply negative during the recession, but improving employment conditions could set the stage for a sustained recovery. Units in thousands
The size of the excess supply of housing is a matter of heated contention. In 2011, the 8.8% of the housing stock that was vacant or employed in seasonal use was 2.1 percentage points above the average since 1965, which translates to about 2.8 million units. Percent of total housing stock
A $375 billion drop in construction and development lending explains about half the contraction in total bank loans since a peak in mid-2008. If construction activity is indeed poised for a rebound, bank growth prospects may be near a turning point.
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