Construction loan defaults at highest level since 1993

The number of development loans written-off by banks in the US is also expected to rise sharply for the final three months of 2008. Of the estimated $60bn in outstanding construction loans as of Q4, 8.2 percent are expected to be non-accrual.

Defaults on construction loans for US residential and commercial developments are set to hit their highest level since 1993, according to preliminary data from Foresight Analytics.

The real estate data provider said the rate of delinquencies on development loans was expected to jump from 9.6 percent in the third quarter of 2008 – to an estimated 11.2 percent in the three months to the end of last year.

Foresight projected there was roughly $60 billion of construction loans outstanding in the final quarter of 2008. The fourth quarter delinquency rate is the highest seen since the end of 1993. An all-time high was achieved in 1992, when 16.1 percent of construction loans in the US were in default.

Final figures, based on Federal Deposit Insurance Corporation (FDIC) information, will be available later this month, however Foresight partner Matt Anderson said a weak housing market was driving the default rate increase, with single-family construction loans the worst affected.

Construction loans cover the residential and commercial real estate sectors, including single-family, multifamily rental/for sale and commercial developments as well as land acquisitions.

The number of construction loans deemed “non-accrual”, or where a bank doubts the debt will be repaid, is also expected to rise sharply over the same period – from 6.9 percent of all loans in the third quarter of 2008 to an estimated 8.2 percent by the end of the year.