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The Distribution of Residential Construction Loans Among Banks

Smaller banks, those with assets of less than $10 billion, hold the majority of residential construction loans, according to NAHB analysis of Federal Deposit Insurance Corporation (FDIC) data. Unlike mortgages, a larger proportion of residential construction loans at FDIC-insured institutions are held by banks with assets between $100 million and $10 billion.Construction LoansIn addition, a greater proportion of mid-sized banks hold residential construction balances on their balance sheet. However, the two middle-tier bank classes do differ from each other. One-third of banks with assets between $100 million and $1 billion have a comparatively larger focus on residential construction loans relative to non-residential construction loans and this share has been growing. Meanwhile, approximately one-ninth of banks with assets between $1 billion and $10 billion hold the same distinction but the share has been falling.

Previous analysis highlighted the growth in 1-4 residential construction lending at FDIC-insured institutions. The growth in 1-4 residential construction loans is consistent with NAHB’s Survey of Acquisition, Development and Construction Financing (AD&C) showing that lending standards continue to ease on net, although the pace of easing slowed in the fourth quarter of 2016. According to NAHB’s Survey, the majority of builders and developers, 84 percent, indicated that commercial banks are their primary source of funding for speculative single-family construction while 79 percent said the same for pre-sold single-family construction.

In 2016, 1-4 residential construction loan balances on the balance sheets of FDIC-insured banks totaled $69.6 billion. The largest banks, those with assets equal to or in excess of $10 billion accounted for just 36 percent of that total. Mid-sized banks accounted for a similar share. Banks with assets between $1 billion and $10 billion accounted for 32 percent and banks with assets ranging between $100 million and $1 billion held 30 percent. In contrast, banks with assets below $100 million accounted for 2 percent. Compare this distribution of residential construction loans to 1-4 first lien mortgages, where banks with assets at or above $10 billion held 82 percent of loans.

The composition of 1-4 family residential construction loan balances has changed during and after the Great Recession. Between 2008 and 2012, the total amount of 1-4 family residential construction lending shrank by 73 percent to $42.3 billion. Over this period, the proportion held by the largest banks fell from 47 percent to 40 percent of the total outstanding, while the percentage at banks with assets between $100 million and $1 billion rose 6 percentage points to 32 percent of the total. There was also an expansion in the share held by banks with assets between $1 billion and $10 billion, although that share fell slightly in 2015 and 2016.

Scaling loan balances by total assets, the largest banks have the smallest concentration of lending. Instead, residential construction loans relative to total assets are greatest at banks with assets between $100 million and $1 billion. Banks with assets ranging between $1 billion and $10 billion also have residential construction loan balances above 1 percent of their total assets. While there is a visible increase in residential construction loans across most bank sizes, shares remains low relative to 2008 rates as the single-family construction market continues to recover to normal market conditions.

A second distinguishing characteristic of banks with assets between $100 million and $10 billion is in their incidence of residential construction loan balances. The figure above shows the proportion of banks with a residential construction loan balance in each asset size category. Approximately 9 out of 10 such banks have residential construction loan balances. A smaller portion of the largest banks, 75 percent, have a positive residential construction loan balance in 2016. After some slight volatility over the years and despite an increase from 2015, this share remains 5 percentage points below its 2008 percentage.

Although the incidence of residential construction loans at mid-sized banks, those with assets between $100 million and $10 billion, are nearly identical, one difference between banks in these two categories is their focus on construction loans. The FDIC provides data on the stock of both residential construction loans and other construction loans including land loans. The figure above graphs the proportion of banks in each size category where residential construction loans exceed the volume of non-residential construction loans and all land loans.

In 2016, 33 percent of banks with assets between $100 million and $1 billion had residential construction loan volume that exceeded its non-residential construction loans balance, three times the percentage of banks in the $1 billion to $10 billion category. In 2008, the percentage at banks with assets between $100 million and $1 billion was two times as great. This is the only bank category where the 2016 percentage exceeds the rate in 2008. In contrast, among banks with assets between $1 billion and $10 billion, 11 percent currently have residential construction loans balances in excess of non-residential construction and land loans.

This post brought to you by NAHB Eye on Housing - April 2017


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