The availability of funds for construction financing continues to be modestly short of “meetings all requests at current interest rates”. The rise in mortgage rates over the last month while inflation expectations declined slightly is evidence that the financial environment for construction weakened in July and early August. While the shortage of lendable funds at the current interest rate is substantial compared to the easy credit period in 2005-06 it is quite modest compared to the more normal credit conditions in 2003-04.

Undoubtedly, construction spending would be higher now if interest rates were lower and poorer credit records were acceptable to lenders. But the credit constraint is small compared to other economic restraints on construction. Home buying is restrained by the recession level of consumer confidence. Commercial construction is restrained by diminishing profit expectations for new buildings. Public and institutional construction spending is restrained by the plunging purchasing power of tax receipts and investment earnings.

The credit environment is expected to be the same or marginally worse through the winter. Then expect improvement in the availability of loans but at a higher cost as the FRB withdraws the extra liquidity it put into the financial system over the last year. The credit constraint may bind harder late next year and in 2010 when loan demand rises quickly in an improving economy.

U.S. Construction Finance Environment — August 2008

	Financial Market Benchmark Rates
	Previous				Annual Average
	Month				Actual		Forecast
	(Jun 08)	Latest			2006	2007	2008	2009
		Week Ending
Federal Funds Rate (overnight)	2.01	Aug 13 08	1.99		4.96	5.02	2.33	2.68
1-Year Treasury Bill (T-Bill) Rate	2.28	Aug 18 08	2.15		4.93	4.52	2.17	2.66
10-Year Treasury Bill (T-Bill) Rate	4.01	Aug 18 08	3.91		4.79	4.63	3.91	4.38
Prime Bank Rate1	5.00	Aug 13 08	5.00		7.96	8.05	5.32	5.53
1 Base for home equity, contractor and business investment loans
	Mortgage Loan Rates
	Previous				Annual Average
	Month				Actual		Forecast
	(Jul 08)	Latest			2006	2007	2008	2009
		Week Ending
1-Year Adjustable Rate Mortgage	5.24	Aug 14 08	5.18		5.53	5.56	5.14	5.14
5/1 Adjustable Rate Mortgage	5.93	Aug 14 08	6.02
15-Year Fixed Rate Mortgage	5.97	Aug 14 08	6.07
30-Year Fixed Rate Mortgage	6.43	Aug 14 08	6.52		6.41	6.34	6.24	6.39
	Previous
	Month		Latest
Core Inflation Rate2	2.1% (May)		May 08	2.1%
Inflation Expectations3	2.43% (Jul)		Jul 8 08	2.45%
2Based on personal consumption expenditures (less food and energy), year over year. 3Based on rates for 10-Year inflation-protected Treasury securities.