With New Construction Booming, Opportunities Abound for Banks

Falling demand for housing and the rising cost of skilled labor has kept the new construction home market from building any upward momentum in recent years. However, things may be about to change.

Newly lowered Fed rates, the falling costs of building supplies and a growing population could boost new construction demand in the coming years.

Understanding the New Housing Market

The construction industry is expected to become one of the fastest growing industries over the next five years, with a projected growth rate of 4.5 percent.

What’s fueling the growth in new construction? A growing population for one.

According to US Census Bureau projections, the US population is anticipated to increase 3.5 percent over the next 5 years. A rise in population spurs demand for new housing, pushing the construction market into a cycle of growth.

Single family home sales are already following the trend. While still considered lukewarm by many experts, the market held steady across the first half of 2019, dropping just 0.3 percent compared to the 2 percent slowdown originally anticipated by realtor.com’s economists.

However, when it comes to single-family home construction, trends are changing, with a shift away from large, high-end market dwellings. As of May, nearly half of the homes sold across the country were less than $300,000 as home builders move toward more affordable options.

Affordability may also play a part in the growing number of households opting to rent instead of buy. In 2017, the Pew Research Center reported that 36.6 percent of households were headed by renters, nearly mirroring the record high of 37 percent from 1965. Millennials led the renting pack as 65 percent of all renting households were 35 or younger.

Attom Data Solutions, curator of the nation’s premier property database, reports that in 59 percent of housing markets across the US, it is cheaper to rent than it is to buy. Trends like this may be why multi-family housing starts were up over 17 percent as of April of 2018, According to the National Association of Home Builders.

Cornering the New Construction Home Market

In many regions, the seller’s market of the post-recession recovery is turning rapidly into a buyer’s nightmare. Freddie Mac estimates that new construction is waning behind population growth. As a result, the U.S. market is 370,000 homes shy of current demand.

Rising demand is a boon to contractors and developers, but it comes at a cost. Decreasing margins plague the industry and result in general contractors doing more of the work themselves. Margins for self-performed work, such as concrete or electrical, have been on the rise since 2016.

More work, however, means less time for other things, such as visits to bank branch offices. To accommodate harried builders, many banks are offering online banking, allowing contractors to check balances, make deposits, pay bills and even apply for a loan from their office computer or mobile device.

Adding convenience is a strong factor in attracting and retaining contractor business. Over 60 percent of businesses covet sophisticated online and mobile banking capabilities or account opening and onboarding tools. A faster and more efficient draw process would also simplify the building process for new construction borrowers.

When it comes to attracting buyers who are looking to build a new home, banks need to be flexible with the financing and willing to offer a helping hand. Sixty-five percent of Americans looking to buy a home express concerns about the costs of buying, and 48 percent fear their financial stability once they do so, according to NerdWallet’s recent survey. The ability to qualify for a loan is a fear that plagues 38 percent of buyers (41 percent for millennials). A bank with a reputation for guiding potential buyer’s through the journey will naturally attract more customers, particularly for the 28 percent of purchasers who are worried about understanding the process. Beyond nurturance and guidance, banks need to make it easy for customers to apply for a loan, submit required materials and make loan payments.

This is where online tools come in for residential buyers as well as commercial contractors. Fortunately, even community banks and credit unions can deliver the online and mobile flexibility that customers, members and contractors need.

Thanks to fintech, there is no shortage of helpers waving a hand to set banks up with the digital banking services they need to meet customer expectations. However, banks should look for experience and flexible solutions that can be designed to fit their needs when considering a partner. Adopting a one-size-fits-all solution is rarely a good solution for the bank or its customers.