Since 2012, housing affordability conditions for prospective homeowners have declined.

The National Association of Home Builders/Wells Fargo Housing Opportunity Index revealed that 77.5% of new and existing home sales were affordable under standard underwriting criteria for a typical family in early 2012.

This places current affordability conditions at a 10-year low. And the problem appears to be getting worse.

Due to lack of resale inventory and insufficient construction of new housing, housing price growth outpaced income growth in recent years.

Combined with a rise in mortgage interest rates, these price gains reduced housing affordability such that by the end of 2018, only 56.6% of new and existing home sales were affordable for a typical family.

The causes of this situation are complex.

On the new construction side, a persistent labor shortage, building material price volatility and tariffs, and growing regulatory burdens on issues like zoning and building codes have held back housing production in areas with growing population and employment.

Financing issues also are holding back the housing market.

While we typically think of mortgage access issues for buyers as the financing issue of focus within the housing sector, a lack of available financing for acquisition, development and construction (AD&C) debt also is an important factor restraining construction and increasing costs.

According to NAHB analysis of FDIC data, the stock of outstanding residential construction loans totaled $79 billion at the end of the final quarter of 2018.

While this is a significant improvement of the $40.7 billion total from the first quarter of 2013, it is substantially smaller than the $203.8 billion stock outstanding from early 2008.

This type of construction financing is primarily undertaken by smaller financial institutions. Banking data shows that 56% of these loans are held by institutions with less than $10 billion of assets.

The stock of these loans experienced 22 straight quarters of expansion until the fourth quarter of 2018. The decline was due to multiple factors. NAHB industry surveys found that interest rates were rising for construction financing, with typical construction spec loans increasing from 5.5% to 6% over the course of 2018.

That survey also found that lending conditions turned from easing to neutral, suggesting more difficult financing conditions by the end of the year. This survey mirrored the Federal Reserve Senior Loan Officer Opinion Survey of overall commercial real estate financing conditions, which has shown tightening conditions since the second quarter of 2015.

This is negative news for those looking to additional supply to help ease the housing affordability crisis in the United States. AD&C financing is critical for land developers and home builders to develop lots and construct homes.

For instance, since 2016, approximately two-thirds of home builders have reported low or very low lot supplies in their markets, according to NAHB surveys. The lack of affordable and ready-to-build lots is often cited by builders as one reason new construction volume remains below historic levels.

NAHB forecasts call for just under 900,000 single-family starts in 2019, compared with a need for between 1.1 to 1.2 million new single-family homes to keep up with population growth, household formation and replacement housing needs.

Housing stakeholders and policymakers should take notice. Tighter availability of AD&C financing will mean future declines for housing affordability.

Improvements for this sector could include allowing Fannie Mae and Freddie Mac to play a more active role in facilitating AD&C financing, particularly among smaller lenders. More active lenders would ensure that land and lots can be developed and homes built for today’s prospective homebuyers.

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