Construction Loans On The Rise

From the Herald/Record:

N.J. banks building bigger portfolios of construction, development loans
By RICHARD NEWMAN

With home equity lending slowing down, New Jersey banks are increasingly counting on short-term loans to builders.

In the 12-month period ended March 31, construction loan portfolios at New Jersey-based banks were up 41 percent compared with the year-prior period, according to a Federal Deposit Insurance Corp. report released Thursday.

Construction lending nationwide grew by about 30 percent.

"Banks in New Jersey and nationwide are beefing up their construction and development lending," said Kathy Kalser, regional manager in the FDIC's New York office.

The increase reflects strong demand for housing construction loans, according to the FDIC's quarterly "State Profile" report on the economy.

Although the housing market has softened in recent months, home building speculators have been busy, and banks are eager to invest in floating-rate construction loans, which, in today's interest-rate environment, are potentially more profitable than fixed-rate mortgages, she said. The increase in construction loans also reflects commercial development like shopping centers and high-rise residential towers.

These construction loans can be riskier for banks than residential mortgages. After all, a lender behind a commercial project could be left holding the bag if a development fails. But if a mortgage debtor falls behind on payments, he can usually sell the house to repay the debt.

A majority of New Jersey's banks rely heavily on fixed-rate home loans, which generally are priced at rates below the current prime rate of 8.25 percent. These loan portfolios for New Jersey banks were up about 12 percent in the 12 months ended March 31.

Meanwhile, portfolios of home equity lines of credit are down 4.5 percent from a year earlier for New Jersey banks, as rates rise and borrowers refinance, paying off these increasingly costly floating-rate loans with new fixed-rate mortgages.

The report also suggests that some of the home builders taking out construction loans may have a harder time selling those new homes. The inventory of homes on the New Jersey market was 70 percent higher in April 2006, compared with April 2005, it said.

Some highlights from the FDIC State Profile Report:

New Jersey State Profile - Summer 2006

An increasing inventory of unsold homes suggests continued slowing in the state’s housing market. The supply of homes on the market in New Jersey was 70 percent higher in April 2006 compared with April 2005, and the increase was more pronounced in certain counties (see Chart 3). Unsold housing inventory in New Jersey represents an estimated 7-month supply, up from 3 months one year ago. The months of supply is higher for New Jersey’s high-priced homes, greater than $1 million, than lower priced homes. Home sales volume also is slowing in the state, declining by 14 percent through April (year-to-date) from one year ago.3

As the supply of unsold homes has grown, the rate of home price appreciation in New Jersey has eased from a high reached in late 2004. Nonetheless, appreciation rates remain high, and all of state’s markets recorded above U.S. average rates in first quarter 2006.4