Overview of Lending Conditions
According to the Federal Reserve Board’s April 2024 Senior Loan Officer Opinion Survey (SLOOS), lending standards for both Commercial Real Estate (CRE) and Residential Real Estate (RRE) tightened across most loan categories in the first quarter of 2024. Although lending conditions were still tightening, the pace was less severe compared to the previous quarter, signaling a slight stabilization in lending practices despite continuing economic challenges.
Residential Real Estate (RRE)
For Residential Real Estate (RRE), all but two of the seven loan categories reported tighter lending standards in Q1 2024. Specifically, GSE-eligible loans (loans eligible for government-sponsored enterprises like Fannie Mae or Freddie Mac) saw more banks reporting looser rather than tighter conditions, indicating a modest easing in this category. Government loans (e.g., loans issued by the Federal Housing Administration, Department of Veteran Affairs, and USDA) showed a neutral reading, meaning the number of banks tightening and loosening lending standards was balanced.
While the trend of tighter lending standards persisted, it was not as severe as it was in Q4 2023. For example, Qualified Mortgage (QM) jumbo loans experienced a notable decrease in the extent of net tightening, falling 11.8 percentage points from Q4 2023 to Q1 2024. This marks the second consecutive quarter where the tightening of these loans has eased.
Weaker Demand for RRE Loans
All categories within RRE experienced weaker demand in Q1 2024, continuing a trend of weaker demand for at least 11 consecutive quarters, dating back to Q2 2021. The subprime category, in particular, has seen weaker demand for 15 straight quarters, suggesting a prolonged period of subdued activity in the lower-end loan segments.
Commercial Real Estate (CRE)
In Commercial Real Estate (CRE), banks reported continued tightening in lending conditions for both multifamily properties and construction & development loans. However, the extent of tightening was less severe than in the previous quarter. These tightening trends have now persisted for nine consecutive quarters for construction & development loans and eight quarters for multifamily properties.
Demand for multifamily loans weakened for the ninth consecutive quarter, with approximately one-third of banks reporting weaker demand. In comparison, construction & development loans saw slightly less weakening, with 16.7% of banks reporting a decrease in demand. This suggests that while demand for multifamily loans has been notably weaker, the construction sector is feeling relatively less strain.
Conclusion
Overall, the first quarter of 2024 showed that both residential and commercial real estate markets are continuing to face tight lending conditions, though the severity of these conditions has slightly lessened compared to prior quarters. Weaker demand, particularly for subprime residential loans and multifamily CRE loans, reflects broader market challenges, including rising interest rates and slower economic growth. As these trends continue, the outlook for both RRE and CRE will depend largely on the evolution of lending standards and demand shifts in the coming months.