Update on the Construction Market

This article is provided by ITR Economics in partnership with IMEC.

Residential and nonresidential construction sectors typically trend asynchronously with each other. Below is an overview of each sector’s current performance as well as our expectations for the next two years.

Residential Construction

Following a surge in activity in 2020−21, the residential construction market, particularly the single-unit market, is now contending with the impacts of affordability constraints. Home prices are at record highs and have risen quickly. The US New Homes Median Sales Price averaged $452,000 for 2022, over $100,000 above the 2020 average. Furthermore, following the record-low mortgage rates of 2020−21, rates surged in 2022, climbing from about 3% at the start of the year to around 7% by October. Rates have since retreated slightly from that peak.

As a result of these affordability issues, we are seeing decline in residential construction activity. Annual US Single-Unit Housing Starts have declined 17% from a mid-2022 peak. US Single-Unit Housing Permits signal further decline is to come. We expect annual Single-Unit Starts will decline into late this year. However, this expectation is predicated on an anticipated shift by the Federal Reserve toward less-restrictive monetary policy decisions as macroeconomic data softens and inflation diminishes. We expect improvement in real incomes and the underlying tightness of housing inventory will contribute to Starts’ next rising trend in 2024.

US Multi-Unit Housing Starts have generally been faring better than the Single-Unit market; changes in housing affordability conditions kept many would-be home buyers in the rental market, driving up demand for Multi-Unit Starts. However, this market is not immune to the impacts of macroeconomic uncertainty and high interest rates, which are beginning to hinder investment. Peaking in November, annual Multi-Unit Starts have declined through December and January. We expect this decline will extend into the middle of 2024.

It is important to note that despite the affordability constraints and cooling macroeconomic environment, we are unlikely to see a Great Recession-like scenario. Vacancy rates and inventory levels are very low for both for-sale homes and rentals, which will cushion decline in both sectors. And, most importantly, the consumer financial metrics that were so precarious leading up to the Great Recession are, by contrast, holding up well today.

Nonresidential Construction

The US nonresidential construction market typically lags the US macroeconomy by about a year, as it takes time to determine needs, allocate funding, and commence the actual construction. Following prior growth in the economy, the nonresidential construction sector is now generally in an upswing (Phase B, Accelerating Growth). In addition, nonresidential construction will benefit from 2021’s federal Infrastructure Investment and Jobs Act over the coming years as the funding is disbursed.

We expect to see rise in annual US Total Nonresidential Construction into mid-2024, but softening in architectural billings indexes and corporate profits suggest the pace of rise will begin to slow by the middle of this year. Rising interest rates will also put some downward pressure on investments in Construction. Decline is expected in the second half of 2024.

Pricing

We are beginning to see decline in monthly US Construction Materials and Components Producer Prices as well as individually in many of the components, such as lumber, metals, and plastics. However, raw material-based construction inputs are more susceptible to price decreases than finished materials and components. We expect general decline in prices will extend into 2024, which will ease some pressure on margins while simultaneously putting downward pressure on dollar-denominated construction metrics.

Given demographic trends, labor costs will likely continue to rise, but trends in inflation and the macroeconomy suggest slowing growth for wages. Look for ways to economize on labor and actively work to improve your employee retention.

Conclusion

Construction trends will vary by geographic region. On the nonresidential side, trends will also vary by industry. Make sure to research your areas of business, as well as any specific nonresidential construction industries you may operate in. Our Trends Report™ provides monthly updates for single-unit residential construction, multi-unit residential construction, and seven nonresidential construction markets.