At Aquila, we want to share our insights into the performance of the small business lending market, specifically in the construction industry. We want to empower the brokers, sales teams, and ISO partners in our network to identify the best funding opportunities that will generate the most revenues, and at the lowest cost for their marketing and sales operations.
As we head to wrap up the second quarter of 2018 small business financing, we want to alert our ISOs to a trend that we are seeing in the construction market: The end of the United States Construction boom.
Given where we are in the economic cycle and the trends we are noticing in our own data, Aquila is ready to call a top on the United States Housing boom launched in 2010. Here are our top three reasons why we believe we are correct to make this call.
Housing starts at a 4-month low as home prices and mortgage rates rise
After 8 years of continuous growth, housing starts statistics have started to show fatigue. In April of 2018, housing starts hit a four month low as the multi-family segment in housing construction continues to cool. What is the “multi-family segment”? Multifamily residential (also known as multidwelling unit or MDU) is a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. A common form of this home is called an apartment building.
Housing starts in the US slumped 3.7 percent month-over-month to an annualized rate of 1,287 thousand in April of 2018, following an upwardly revised 3.6 percent rise in March. It is the lowest rate in four months, mainly due to a sharp fall in the multi-family segment. It compares with market expectations of 1,310 thousand rate.
The volatile multi-family segment dropped 12.6 percent to 374 thousand while single-family starts, the largest segment of the market, edged up 0.1 percent to 894 thousand. Overall, housing starts declined in the West (-12 percent to 346 thousand), the Midwest (-16.3 percent to 164 thousand) and the Northeast (-8.1 percent to 114 thousand) but rose in the South (6.4 percent to 663 thousand).
Of course, it may be that this is a seasonal or random adjustment, a possible breather in continued growth. However, we think that’s not the case against slacking demand due to increasing mortgage rates and increasing home prices. As the Federal reserve continues to raise interest rates, mortgage rates will continue to rise, leading to a subsequent cooling of demand and a drop in mortgage applications. We are seeing the impact of tightening monetary policy.
Mortgage rates have been creeping up. The average 30-year, fixed-rate mortgage is now more than 4.5 percent. Home prices are also rising. And the combination is putting home ownership out of reach for many Americans.
Rates are on the move higher again, and that caused mortgage application volume to drop 1.5 percent last week from the previous week and 15.4 percent than a year ago, according to the Mortgage Bankers Association’s seasonally adjusted report.
Construction volume submissions are down over 2017
At Aquila we have noticed that construction submission volume in our 367 ISO partner network continues to decline. Compared to 2017 construction submission in the first half of 2017, Aquila 2018 construction submissions have fallen by more than 30 – 40%. At Aquila, lower construction volumes have coincided with higher lender competition for increased volume. When we see other lenders lowering their underwriting requirements for increased construction volume, we know they are responding to decreased, overall demand.
Construction business defaults are on the rise over 2017
At Aquila we’re seeing an uptick on construction defaults in our bank data analysis of hundreds construction small business bank accounts. More constructions firms are submitting for short-term financing with existing and ongoing defaults with banks and many MCA companies. At Aquila, we’re seeing an uptick of at least 50% of all new construction submissions with current MCA funding defaults or over-extended, short-term debt positions. We expect this number to grow and the number of submitted construction deals with healthy balance sheets to continue to decline.
What do ISOs need to do today?
ISOs should continue to take the performance and other incentives that their lender partners are giving to compete for their declining construction business. This short-term growth will not last as ISOs and other lenders compete for this declining share of the small business lending pie with more marketing dollars. The inevitable decline in volume requires ISOs to look elsewhere. To seek growth, ISOs need to focus on new SIC codes that will thrive in a slowing construction-driven economy. ISOs can call our team for early release information before we share this data with the industry. If you are not yet an Aquila broker partner, you may sign-up for Aquila’s ISO program here.
If you are already an ISO, please call us or send us an SMS today at +1 (415) 598-9549 for one of our team members to share more valuable insights into the top SICs, generating the most commissions, on our platform.