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Credit Conditions for Builders Tighten

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For the fourteenth consecutive quarter, builders and developers reported tighter credit conditions on loans for residential Land Acquisition, Development & Construction (AD&C) in NAHB’s quarterly survey on AD&C Financing.  

In the second quarter of 2025, the NAHB survey’s net easing index posted a reading of -12.3 (the negative number indicating that credit tightened since the previous quarter).  This is in reasonably close agreement with the second quarter reading of -9.7 for the similar net easing index derived from the Federal Reserve’s survey of senior loan officers.  Like the NAHB net easing index, the one from the Fed has been in negative territory (indicating credit tightening) for fourteen consecutive quarters.  Over the past year the additional tightening indicated by both indices has been relatively modest, with index levels hovering between -20 and 0.  Modest or not, however, after fourteen straight quarters of tightening, many builders are probably wondering how much room lenders have left to tighten further.    

More details from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—appeared in a previous post.

According to NAHB builders, the most common ways lenders tightened credit on AD&C loans in the second quarter were by reducing the amount they are willing to lend (cited by 60% of the builders who reported tighter credit), requiring personal guarantees (53%), increasing the interest rate and not making new loans (47% each), and increasing documentation requirements (40%). 

Also in the second quarter, the cost of credit declined on loans made specifically for residential land acquisition (the “A” in AD&C).  The average contract interest rate on the loans declined from 8.23% to 7.82%, while the average initial points dropped from 0.71% to 0.56%.  As a result, the average effective interest rate (which takes both the contract rate and initial points into account) on land acquisition loans declined from 10.68% to 9.95%.

For the other three categories of AD&C loans tracked in the NAHB survey, credit became more expensive since the previous quarter.  The average contract interest rate increased on loans for land development (from 7.86% to 8.04%) and speculative single-family construction (from 8.08% to 8.17%), while declining only slightly (from 7.96% to 7.95%) on loans for pre-sold single-family construction.  Meanwhile, average initial points were unchanged at 0.74% on loans for land development, but increased from 0.68% to 0.72% on loans for speculative single-family construction, and from 0.45% to 0.58% on loans for pre-sold single-family construction.

Those combinations of quarter-to-quarter changes took the effective interest up from 11.50% to 11.77%  on loans for land development, from 12.59% to 12.82% on loans for speculative single-family construction, and from 12.49% to 12.73% on loans for pre-sold single-family construction.

Although the average effective interest rate was higher in 2025 Q2 than in 2025 Q1 for three of the four categories of AD&C loans, the rate was down year-over-year for all four. 

Financing costs for builders and developers could decline further over the next quarter, especially if (as NAHB expects) the Federal Reserve reduces the target federal funds rate at its September meeting.  In fact, as discussed in NAHB’s post on the Fed’s July meeting, a reduction in construction financing costs rather than an effect on mortgage rates is the main benefit builders can expect from easier monetary policy.

More detail on credit conditions for residential builders and developers is available on NAHB’s AD&C Financing Survey web page.

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Builders’ Use of Artificial Intelligence

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The majority of single-family home builders do not currently use Artificial Intelligence (AI) in their businesses.  For the highest use, 20% of builders use AI to generate advertising/marketing materials and 11% to help analyze markets/plan projects.  Less than 5% currently use this tool to help with another 10 business functions, from designing projects to operating automated construction equipment in the chart below. These findings were derived from the July 2025 survey for the NAHB/Wells Fargo Housing Market Index (HMI) and reflect an early industry reading likely to evolve in the coming years.

Builders not currently using AI were asked about the likelihood they will start doing so in the next two years (using a scale from 1 to 5, where 1=not at all likely and 5=very likely).  Not surprisingly, the two areas most likely to see new builders adopting AI are the generation of advertising/marketing materials (average rating 3.6) and the analysis of markets/plan projects (3.0)—the same ones that boast the largest adoption rates already.

Meanwhile, the chance that builders will take up the use of AI in any of the other business functions is much lower, as all 10 received average likelihood ratings below 3.0.  The two areas where builders are least likely to start using AI in the next two years are in the operation of automated construction equipment (average rating: 1.7) and to interact with the local building or planning department (1.9).

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Residential Remodelers Outnumber Single-family Builders in the U.S.

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The number of residential remodelers in the U.S. has reached a record high of 128,187 establishments, 65% higher than the number of residential builders (single-family and multifamily), which stands at 77,455.  These official government counts were released by the U.S. Census Bureau as part of its 2022 Economic Census, which tallies American businesses every five years (in years ending in 2 and 7).

Growth in the number of remodelers significantly outpaced that of builders between 2017 and 2022. In that 5-year span, the remodeler count increased by 25% (102,818 to 128,187), while the number of builders grew at half that pace–by 12% (68,996 to 77,455).

A starker dichotomy emerges when comparing 2022 counts to those in 2007, prior to the financial crisis and the ensuing housing recession.  In that 15-year period, the official number of residential remodelers in the U.S. grew by 73% (73,888 to 128,187), while the official number of residential builders contracted by 21% (98,067 to 77,455).

Another way to analyze this data is by creating a combined universe of both builders and remodelers and then calculating each group’s share of the total. In 2022, for example, remodelers represented 62% of the total number of builders and remodelers in the U.S, while builders made up a minority share of 38%.  Remodelers have accounted for at least 60% of this total in the last three Economic Census (2012, 2017, and 2022). 

The last time builders comprised a majority share was in 2007, when they represented 57% of the combined total number of builders and remodelers in the country.

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Cost of Credit Eases for Builders and Developers

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The cost of credit for residential Land Acquisition, Development & Construction (AD&C) eased in the first quarter of 2025, according to NAHB’s survey on AD&C Financing. During the quarter, the average contract interest rate declined on three of the four categories of loans tracked in the NAHB survey: from 8.48% in 2024 Q4 to 8.23% on loans for land acquisition, from 8.28% to 7.86% on loans for land development, and from 8.34% to 8.08% on loans for speculative single-family construction. The average rate on loans for pre-sold single-family construction meanwhile bucked the trend, increasing from 7.75% to 7.96%.

In addition to interest, lenders also typically charge initial points on the loans. The points can affect credit costs as much as the interest rate—especially for loans paid off as quickly as most of those for single-family construction. In the first quarter of 2025, average points declined from 0.75% to 0.74% on loans for land development, and from 0.67% to 0.45% on loans for pre-sold single-family construction; but increased from 0.55% to 0.71% on loans for land acquisition, and from 0.64% to 0.68% on loans for speculative single-family construction.

The change in points was sufficient to offset the increase in interest rates on loans for pre-sold single-family construction, but not the reduction in rates on the other three categories of AD&C loans. As a result, the average effective interest rate (calculated taking both the contract rate and initial points into account) declined in all four cases: from 10.79% to 10.68% on loans for land acquisition, from 12.12% to 11.50% on loans for land development, from 12.86% to 12.59% on loans for speculative single-family construction, and from 12.98% to 12.49% on loans for pre-sold single-family construction.

Except for what now looks like a temporary reversal for construction loans in 2024 Q4, the average effective rate on AD&C loans has been trending downward for about a year. This stands in contrast to the average rate on 30-year fixed-rate mortgages, which has levelled off and even started to edge up again after coming off its 2023 peak.

While the cost of AD&C credit was declining, the NAHB survey shows that lending standards on AD&C loans were still tightening in the first quarter, although the reports of tightening were less widespread than they had been at any other time over the past three years. The net easing index derived from the survey posted a 2025 Q1 reading of -10.0 (the negative numbers indicating that net credit had become tighter since the previous quarter). This is the closest the NAHB index has come to hitting the break-even point of zero since the first quarter of 2022.

At the same time, the similar net easing index derived from the Federal Reserve’s survey of senior loan officers posted a 2025 Q1 reading of -11.1. This is down slightly from the previous quarter, but still ranks as the second highest reading for the Fed index since the first quarter of 2022. The Fed survey of lenders and the NAHB survey of builders and developers have been telling very similar stories recently, especially over the past five quarters. More details from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—are discussed in a previous post.

Perhaps surprisingly, given the above results on declining credit costs, raising interest rates (cited by 57% of builders and developers who reported that availability of credit had worsened in the first quarter) has displaced lowering the loan-to-value or loan-to-cost ratio (50%) as the number-one way NAHB members say lenders are tightening conditions on AD&C loans. It is important to remember that relatively few NAHB members reported worse credit availability in the first place in 2025 Q1, so these percentages are based on a relatively small sample. Tied for third place, each cited by 43% of builders and developers, are increasing documentation requirements and requiring personal guarantees or collateral not related to the project. Meanwhile, the share of builders and developers who say lenders are reducing the amount they are willing to lend fell to 36%—the lowest percentage for this mode of tightening since 2018.

More detail on credit conditions for residential builders and developers is available on NAHB’s AD&C Financing Survey web page.

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Despite Exemptions and Delays, Tariffs are Already Affecting Builders

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Home builders have already started to feel the effects of U.S. tariff policy, according to recent NAHB member surveys. This is true even though the Administration did not announce its list of reciprocal tariffs until April 2nd, lumber along with USMCA-compliant imports from Canada and Mexico were exempt, and a week later the Administration enacted a 90-day hiatus, with tariffs on countries other China limited to 10% over this time. The Administration subsequently granted further temporary exemptions from the reciprocal tariffs for a broad range of electronic products imported from China.  

After all this, significant uncertainty about the final outcome still remains. The U.S. may revisit trade policy for Canada and Mexico, China-U.S. negotiations are unsettled, and the effects of the 10% tariff on building products from other countries are difficult to predict. Moreover, exactly what will happen at the end of the 90-day hiatus is unclear. In the meantime, economic uncertainty can adversely affect consumer confidence and make prospective home buyers hesitate. This is one of the reasons the NAHB/Wells Fargo Housing Market Index (HMI) declined in March.

The latest NAHB estimate (based on cost data from RSMeans and PPI inflation rates) is that the average new single-family home requires $174,155 worth of building materials. Previous NAHB research has shown that 7.3% of materials in residential construction, or $12,713 of materials costs for the average single-family home, is imported.

Based on this, it may seem that tariffs would have a limited effect on home builders. However, as noted above, the uncertainty caused by the mere announcement of tariffs can have an adverse effect on the behavior of consumers and even businesses. In recent surveys, NAHB builders and remodelers reported that building material suppliers had already increased their prices—by an average of 5.5% and 6.9%, respectively—due to announced, enacted or anticipated tariffs.

The data on builders came from the HMI survey and were collected during the first two weeks of March. The data on remodelers came from the survey for the NAHB/Westlake Royal Remodeling Market Index and were collected during the last week of March and first three days of April.

NAHB will continue to monitor material prices given the uncertainty and fluidity of the tariff situation. 

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Where Do Builders and Remodelers Buy Building Products?

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The most common sources for products used in home building and remodeling are specialty retailers, lumber yards, and wholesale distributors, according to two recent NAHB surveys. The surveys include one of single-family homebuilders in the October 2024 NAHB/Wells Fargo Housing Market Index (HMI) and one of remodelers in the Q3 2024 NAHB/Westlake Royal Remodeling Market Index (RMI). Both surveys asked respondents where they purchase building products, regardless of who ultimately purchases them (themselves or subcontractors)

When averaging across 24 building product categories, the top three major channels of distribution are roughly the same for both builders and remodelers. Specialty retailers, lumber yards, and wholesale distributors together account for around 70% of building product purchases.

When analyzing the specific products purchased at lumber yards, the top products purchased by both builders and remodelers were basic lumber products including plywood & OSB, sawn lumber, and engineered lumber & I-joists.

One major difference between builders and remodelers was the share of those who purchase products from home improvement centers.  Remodelers are three times as likely to buy products at this channel of distribution compared to builders.  Nevertheless, one specific product category, hand & power tools, is purchased at home improvement centers by a majority of both remodelers (68%) and builders (56%).  Of those that do purchase hand & power tools at home improvement centers, 11% of remodelers purchased at least one other product there compared to 3% of builders. 

A subsequent post on who is most often responsible for choosing these products will come later. Please click here to be redirected to the full report.

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Builders’ Profit Margins Improved in 2023

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Profitability for single-family home builders reached the highest levels in more than a decade in 2023.  Industrywide profit benchmarks are important because they allow companies to compare their financial performance against the entire industry.  Doing so can guide resource allocation, budgeting, and target setting for costs and expense lines.  More broadly, understanding industry benchmarks can lead to an improved business strategy and to higher financial results. 

On average, builders reported $11.3 million in total revenue for fiscal year 2023.  Of that, about $9.0 million (79.3%) was spent on cost of sales (i.e., land, direct and indirect construction costs), which translates into an average gross profit margin of 20.7%.  Operating expenses (i.e., finance, S&M, G&A, and owner’s compensation) cost builders an average of $1.4 million (12.0% of revenue), leaving them with an average net profit margin of 8.7%.  This post summarizes the results from NAHB’s most recent edition of the Builders’ Cost of Doing Business Study.

Based on historical survey data (performed every three years), the 20.7% average gross profit margin in 2023 was the highest registered since 2006 (20.8%).  As a point of reference, builders’ gross margin sank to a record low of 14.4% in 2008 (i.e., during the housing recession), but bounced back steadily through 2017 (19.0%).  The onset of COVID-19 in 2020 increased costs, causing builders’ average gross margin to drop (18.2%) for the first time since 2008.

The 8.7% average net profit margin for fiscal year 2023 is the highest in this survey’s recent history, exceeding the 7.7% reported in 2006.  However, increased use of financial incentives, such as mortgage rate buydowns, and cuts in home prices are likely to have caused this margin to shrink in 2024.

The Cost of Doing Business Study also tracks builders’ balance sheets.  On average, builders reported $7.2 million in total assets on their 2023 balance sheets.  Of that, $4.5 million (62%) was financed by liabilities (either short- or long-term) and the other $2.7 million (38%) by equity builders held in their companies.

Historical data show the average $7.2 million in total assets in 2023 was 23% lower than in 2020 ($9.4 million), and builders’ lowest asset level since 2010 ($6.2 million).  But perhaps more important than fluctuations in the size of their balance sheets, the data reveal a long-term decline in builders’ reliance on debt to finance their operations: in 2006, 74% of their assets were backed up by debt; by 2020, the share was down 10 points to 64%; and by 2023, it dropped to a record low of 62%. Logically, the latter means builders are using more of their own capital to run their companies, as illustrated by their equity share rising from 26% of assets in 2006 to 38% in 2023.

The NAHB Economics team will conduct a Cost of Doing Business Study for residential remodelers in the spring of 2025. If that is your firm’s primary activity, please consider participating in this confidential survey. We simply can’t produce benchmarks without your input.  To participate, please complete this form. A summary of the most recent profitability benchmarks for residential remodelers is available in this blog post.

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Credit for Builders Tightens, Cost Results Mixed

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Borrowers and lenders agreed that credit for residential Land Acquisition, Development & Construction (AD&C) tightened further in the fourth quarter of 2024, according to NAHB’s survey on AD&C Financing and the Federal Reserve’s survey of senior loan officers. The net easing index derived from the NAHB survey posted a reading of -16.3, while the similar index derived from the Fed survey posted a reading of -9.5 (the negative numbers indicating that credit tightened since the previous quarter). Although the additional net tightening in the fourth quarter was modest (as indicated by negative numbers much closer to 0 than -100), this marks the twelfth consecutive quarter during which both surveys reported net tightening of credit for AD&C.

According to the NAHB survey, the most common ways in which lenders tightened in the fourth quarter were by lowering the loan-to-value or loan-to-cost ratio (reported by 72% of builders and developers) and reducing the amount they are willing to lend (61%).  Additional information from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—is discussed in an earlier post.

For the second consecutive quarter, the contract interest rate declined on all four categories of loans tracked in the NAHB AD&C survey.  In the fourth quarter of 2024, the average contract interest rate declined from 8.50% in 2024 Q3 to 8.48% on loans for land acquisition, from 8.83% to 8.28% on loans for land development, from 8.54% to 8.34% on loans for speculative single-family construction, and from 8.11% to 7.75% on loans for pre-sold single-family construction.

In addition to the contract rate, initial points charged on the loans can be an important component of the overall cost of credit, especially for loans paid off as quickly as typical single-family construction loans. In the fourth quarter, trends on initial points were mixed. The average points declined on loans for land acquisition, from 0.77% in 2024 Q3 to 0.55%. However, average points increased quarter-over-quarter on loans for land development (from 0.68% to 0.75%), pre-sold single-family construction (from 0.26% to 0.67%) and speculative single-family construction (from 0.49% to 0.64%).

Not surprisingly, the conflicting trends described above resulted in mixed results for the overall cost of AD&C credit, as indicated by the average effective interest rate (which takes both the contract rate and initial points into account).  In the fourth quarter of 2024, the average effective rate declined  on loans for land acquisition from 11.17% in 2024 Q3 to 10.79%, and on loans on land development from 12.82% to 12.12%.  Meanwhile, the average effective rate increased on loans for speculative single-family construction from 12.61% to 12.86%, and on loans for pre-sold single-family construction from 12.03% to 12.98%. Even after these disparate changes between 2024 Q3 and 2024 Q4, the average effective interest rates on all four categories of AD&C loans were at least slightly lower in 2024 Q4 than they were in 2024 Q2.

More detail on credit conditions for residential builders and developers is available on NAHB’s AD&C Financing Survey web page.

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Builders’ Top Challenges for 2025

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The most significant challenge builders faced in 2024 was high interest rates, as reported by 91% of builders in the latest NAHB/Wells Fargo Housing Market Index survey.  A smaller, albeit still significant share of 78% expect interest rates to remain a problem in 2025. The next four most serious issues builders faced in 2024 were rising inflation in the U.S. economy (80%), buyers expecting prices/interest rates to decline (77%), the cost/availability of developed lots (63%), and the cost/availability of labor (61%).  Builders don’t expect much improvement in these challenges in 2025, except for rising inflation, which ‘only’ 52% see as a serious problem in the year ahead.

In addition to those top tier challenges, 55% to 60% of builders also reported facing serious problems in 2024 with gridlock/uncertainty in Washington (60%), building material prices (57%), concern about employment/economic situation (55%), impact/hook-up/inspection and other fees (55%), and negative media reports making buyers cautious (55%). Looking ahead at 2025, significantly fewer builders expect gridlock/uncertainty in Washington (32%) or have concerns about the employment/economic situation (39%).  In contrast, more builders are expecting building material prices to be a problem in 2025 (64%) and about the same expect continuing problems with impact and other fees (58%).

Builders have been asked about their most serious challenges every year since 2011. High interest rates have been a problem for a negligible share of builders (under 10%) during most years, except for 2022 (66%), 2023 (90%), and 2024 (91%).  When first introduced to the survey in 2021, 63% of builders reported challenges with rising inflation in the U.S. economy, but the share grew to at least 80% in 2022, 2023, and 2024. Prior to 2022, relatively few builders reported problems with buyers expecting prices or interest rates to fall, but that share rose to 49% in 2022, 71% in 2023, and 77% in 2024.

The cost/availability of developed lots has been a serious challenge to most builders in nine of the 14 years of the series history. In 2022, 51% of builders faced this problem; by 2024, 63% did—tying a record high set in 2019. Meanwhile, more than half of builders have reported the cost/availability of labor as a serious problem for the past 11 years in a row. While 82% and 85% of builders faced this challenge in 2021 and 2022, respectively, the share has eased to 73% in 2023 and to 61% in 2024.

For additional details, including a complete history for each reported and expected problem listed in the survey, please consult the full survey report.

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Credit Still Tight, But Builders Finally Get Some Relief from Interest Rates

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In the third quarter of 2024, borrowers and lenders agreed, as they have over most of the past three years, that credit for residential Land Acquisition, Development & Construction (AD&C) tightened. On the borrower’s side, the net easing index from NAHB’s survey on AD&C Financing posted a reading of -12.0 (the negative number indicates credit was tighter than in the previous quarter). On the lender’s side, the comparable net easing index based on the Federal Reserve’s survey of senior loan officers posted a similar reading of -14.8.  Although the additional net tightening was relatively mild in the third quarter (as indicated by negative numbers that were smaller, in absolute terms, than they had been at any time since 2022 Q1), both surveys indicate that credit has tightened for eleven consecutive quarters—so credit for AD&C must now be significantly tighter than it was in 2021.   

According to  NAHB’s survey, the most common ways in which lenders tightened in the third quarter were by lowering the loan-to-value (or loan-to-cost) ratio, and requiring personal guarantees or collateral not related to the project—each reported by 61% of builders and developers. After those two, reducing the amount lenders are willing to lend was in the third place, with 56%.

Additional information from the Fed’s survey of lenders—including measures of demand and net easing for residential mortgages—is discussed in an earlier post.

Although the availability of credit for residential AD&C was tighter in the third quarter, builders and developers finally got some relief from the elevated cost of credit that has prevailed recently. In the third quarter, the contract interest rate decreased on all four categories of AD&C loans tracked in the NAHB survey. The average rate declined from 9.28% in 2024 Q2 to 8.50% on loans for land acquisition, from 9.05% to 8.83% on loans for land development, from 8.98% to 8.54% on loans for speculative single-family construction, and from 8.55% to 8.11% on loans for pre-sold single-family construction.

More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page.

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