Homebuilding rebound and infrastructure swagger tease construction’s strength

By Larry StewartMay 17, 2023

Conditions point to an extended homebuilding rebound that started in April and nonresidential sector marching regardless of threats from interest rates, banking tumult, national debt-limit politics and recession fears. (Data: U.S. Census Bureau)

National preoccupation with threat of Federal default, interest rates and recession could talk us into a recession but recent construction-economy numbers remind us of this industry’s staying power.

Before Federal Reserve policymakers signaled a pause in the rate-raising campaign early in May, April U.S. housing starts rebounded and contractors’ infrastructure backlog grew.

Pandemic behind us

“A lack of existing inventory and stabilizing mortgage rates helped push single-family production up to the highest rate thus far in 2023 even as builders continue to deal with high construction costs, persistent labor shortages and tightening credit conditions for construction loans,” Robert Dietz, chief economist and senior vice president for housing policy at the National Association of Home Builders pointed out after analyzing U.S. Census Bureau monthly housing-construction estimates.

Interest rates more than doubling from 2021 have choked housing demand and driven an 18% plunge in new single-family housing starts since the pre-pandemic peak. But dollars spent on residential construction leaped a whopping 39% over that same period. Rising costs of construction inputs – some breathtaking, such as drywall, lumber and fabricated metal back in 2021 – cut deeply into the profit from that spending surge. Builders do, however, continue to make significantly more money, devoting every input, from lots to labor, to a much higher proportion of high-value homes.

Housing starts rebound

Overall housing starts in April increased 2.2% to a seasonally adjusted annual rate of 1.40 million units. according to a report from the U.S. Department of Housing and Urban Development and the. Builders would begin 1.40 million housing units if development kept at the April pace for the next 12 months.

Single-family starts increased 1.6% to an 846,000 seasonally adjusted annual rate. That’s more than 28% below April 2022 but single-family starts have gradually improved since January. This consistent growth is reflected in the NAHB/Wells Fargo Housing Market Index, a monthly reading of home builder confidence that crossed the key break-even threshold of 50 with the May survey.

New construction is assuming an increased role in the housing market because many homeowners with loans well below current mortgage rates are electing to stay put, keeping the supply of existing homes for sale low. In March, 33% of homes listed for sale were new homes in various stages of construction. That share from 2000 to 2019 averaged 12.7%. With limited available housing inventory, new construction will continue to be a significant part of prospective buyers’ searches.

Single-family permits increased 3.1% to an 855,000-unit rate. They’re down 21.2% compared to a year ago.

“As the Federal Reserve nears the end of its tightening of financial conditions, we expect mortgage rates to moderate in the months ahead, and this will lead to a gradual improvement in single-family production,” Dietz said.

Multifamily housing starts, which includes apartment buildings and condos, increased 3.2% to an annualized 555,000 pace. The sector’s starts have grown nearly 5.5% since the onset of the pandemic.

Nonresidential construction growing

After declining to a seven-month low in March, the Associated Builders and Contractors’ nonresidential Construction Backlog Indicator increased by 0.2 to 8.9 months in April due to strength in the infrastructure category, according to an ABC member survey. The reading is 0.1 months higher than in April 2022.

Nonresidential construction spending has grown 19% since the onset of the pandemic, and all three readings in ABC’s Construction Confidence Index remain above the threshold of 50, indicating expectations of growth over the next six months. Readings for sales and staffing moved higher in April, while expectations for profit margins inched lower.

“Based on ABC member sentiment, one would not be able to discern that interest rates are high, the nation’s banking sector is in tumult, politicians are arguing over the nation’s debt limit and recession fears remain pervasive,” said ABC Chief Economist Anirban Basu. “Despite many headwinds and an active news cycle, contractors continue to express confidence in the near term.

“Still, there is some evidence of a shift,” said Basu. “With credit conditions tightening, expectations are that private construction is poised for weaker times ahead. Nonetheless, backlog expanded in April, as infrastructure contractors began to take on more public works projects. Moreover, despite rapidly rising compensation costs, more ABC contractors expect profit margins to expand as opposed to recede over the next six months, evidence of sufficiently strong demand for construction services to support pricing power.”

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