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Construction & Housing Economists Detail 2014 Forecast





The economic status of the homebuilding and construction sectors are improving, according to three leading analysts, but several factors - including slumping public spending, a tightening labor force and a shortage of first-time homebuyers - continue to create headwinds that have prevented the industries from making substantial, sustainable gains.


Three leading construction and housing economists - Associated Builders and Contractors (ABC) chief economist Anirban Basu, American Institute of Architects (AIA) chief economist Kermit Baker and National Association of Home Builders (NAHB) chief economist David Crowe - provided insights on the status of residential and non-residential building, labor and homebuyers in an online seminar sponsored by the ABC on August 4.






Baker said that the AIA is projecting housing demand to average 1.6-1.9 million units annually over the coming decade, based on expectations of household growth, second home needs and losses in housing stock. Much of the growth is likely to come from an influx of immigration.

"Some conditions in the housing market are getting better, especially for existing owners," Baker said. "We're seeing home prices rise again, homeowners are working to pay down their debt levels, and we're seeing equity levels rise above debt levels for the first time in many years, which should help to unthaw the housing market moving forward."

The fundamentals of the non-residential building market are also improving, according to the AIA's analysis of market data, especially in light of the fact that commercial property values actually fell several percentage points farther during the recession than housing values.

"The big difference between the commercial market and the residential market is that while house prices hit bottom in 2009, they plateaued at that bottom for about three years," Baker said. "In contrast, commercial property values began to recover shortly after they hit bottom in early 2010. To date, commercial property values have actually bounced back nicely; they're up more than 50 percent since they hit their bottom in 2010. Housing prices have moved up more recently, but they're up less than 30 percent from their low point in 2009 to 2012."

In addition, the AIA's architecture billings index has been generally positive for the last 18 months, which suggests the beginning of a non-residential construction recovery. The fourth quarter of 2013 and the first quarter of this year were relatively weak, but the recent ABI scores have showed strong gains and solid momentum moving into the latter part of the year.






NAHB economist David Crowe followed Baker's comments with less-than-upbeat news about the housing market, which has struggled to contribute positively to the recession's sluggish recovery. The NAHB's analysis and forecast, which shows single-family housing starts at only about half of pre-recession levels, predicts that starts will not return to normal activity until the end of 2016. The listlessness is attributable in large part to a lack of purchasing power among younger, first-time homebuyers, which has had a ripple effect on the larger market.

"The share of existing homes sold to first-time homebuyers is somewhere generally above 40 percent, but that has sunk down around the high-20 percent [range] right now," Crowe said. "Without that first-time homebuyer buying those existing homes, the existing homeowner either isn't buying another existing home, or - more importantly, from a homebuilder standpoint - isn't moving forward into a new home."

Crowe also noted market 'headwinds' that have come in the form of shortages among skilled workers and prepared lots for building.

"We have a high percentage of reports [showing] a low supply of lots, and yet we're nowhere near that kind of elevation in total production. That same comparison applies to the labor supply," Crowe said. "As we've seen production return, the labor supply issue has become much more stressful - in fact, upwards of two-thirds of builders are now reporting a shortage."






Despite these struggles, the larger construction sector is moving toward noteworthy growth, according to ABC economist Anirban Basu. The ABC expects construction spending gains to reach about five or six percent growth by the end of 2014, though Basu noted that much of the growth will have to come in the latter half of the year.

"Construction is now adding jobs faster than the balance of the economy," Basu said. "Over the past year, the overall economy has added roughly 1.8 or 1.9 percent to total jobs; construction has added 3.2 percent. Residential building [employment] is up 8.3 percent year-over-year, and non-residential building is up 3.3 percent."

Growth in non-residential sectors has been led by the construction of new power and energy plants (up 25.9 percent year-over-year as of May 2014), conservation and development building (up 16.0 percent YoY) and lodging (11.4 percent increase YoY).

"Certain segments of non-residential construction are recovering faster than others, and the institutional component is not recovering as quickly. Health care construction spending between May 2013 and May 2014 fell 10 percent, which falls in that institutional segment," Basu said. "We are not seeing growth in categories like public safety, sewage and waste disposal, education and water supply, which is publicly financed construction ... state and local government budgets continue to be quite fragile, as many of them are dealing with retired healthcare costs, pension underfunding, and they are not getting much support from the federal government either."

Basu also warned that the improvements in construction spending, combined with the labor shortages throughout the industry, are likely to lead to inflation in prices, wages, and ultimately throughout the economy, as the Federal Reserve loosens its grip on extraordinarily low interest rates meant to spur growth.

Despite many ongoing concerns, all three economists shared a generally positive outlook for the future of the construction and housing markets, and expect continued improvements through the end of 2014 and beyond.








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October 17, 2019, 9:30 pm PDT

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