The U.S. Census Bureau and the U.S. Department of Housing and Urban Development will release their report on the country’s new residential construction for March on Tuesday morning. Economists expect a slight increase in the rate new construction, following the trend of the sector’s steady recovery from the 2007 crash. Here are five things to watch for.
1. Steady as She Goes
Economists expect the March numbers to show the annualized rate of new residential construction to grow by 2.6 percent to 1.27 million units per year.
While that rate is still a million units per year off the pace set at the peak of the boom in the mid-2000s, continued growth in the housing sector has the trend line pointing in the right direction. Economists expect residential construction to make a moderate contribution to the year’s economic growth.
“We don’t think it gets back to boom times, but we don’t want it to,” said Scott J. Brown, senior vice president and chief economist at Raymond James Financial Inc. “But a nice steady state consistent with the economy’s fundamentals is pretty healthy.”
2. Supply < Demand = Seller’s Market
Despite the steady recovery, builders are struggling to meet demand.
“Supply is still far below long-term demographic demands,” said Stan Shipley, senior managing director at Evercore ISI. “It’s getting a lot closer than before, but it’s not there yet.”
That tightness makes for a seller’s market. The S&P/Case-Shiller 20-City Composite Home Price Index, which tracks home prices in 20 of the country’s metropolitan markets, just surpassed its pre-crash peak earlier this year.
Without the supply to meet demand, prospective home buyers shouldn’t expect the relentless rise of prices to let up anytime soon.
3. Costs Cap New Construction
The National Association of Home Builders/Wells Fargo Housing Market Index survey of single-family homebuilders shows confidence has been consistently at near-record highs. If builders are confident and demand is there, what’s stopping the market from meeting demand?
Costs.
“What we’re seeing is new construction has struggled to take off and plateaued in the single-family space at a time when we know demand is strong,” said Aaron Terrazas, senior economist at Zillow. “At a time when you’d expect new construction to take off, we’re not seeing that happen because of the costs builders are facing.”
The number one issue builders report facing is the costs of recruiting and retaining labor. Materials come in a close second. The price of lumber has risen 41 percent since the start of 2017, an increase fueled by wildfires and tariffs on Canadian softwood lumber.
4. The Multifamily Sector Maxes Out
Last month’s report showed the rate of total housing starts dropped 7 percent from January to February.
That decline came entirely from a 28 percent drop in the rate of starts in the volatile multifamily sector. The rate of single-family starts—which most economists treat as a more accurate depiction of the sector—actually grew 2.8 percent from January to February.
The multifamily sector has played a huge role in the housing recovery, with large urban residential units taking up its largest share ever of American housing.
But the multifamily boom has shown signs of plateauing. Since peaking in mid-2015, the trend line, despite month-to-month volatility, has flattened out.
5. What’s Weather’s Role?
After a reasonably mild January and February, spring struggled in the face of a nor’easter and other inclement weather. While spring usually marks the beginning of the building season, the nasty weather may keep the seasonally-adjusted numbers a bit on the low side.
But bad weather may have also boosted the numbers, just some time after the fact. The large housing markets in Florida and Texas are still in a position to juice the national numbers as they continue their recovery from the past year’s brutal hurricane season.
“Given that they’re such big markets, we’re trying to pull out disaster issues away from economic fundamentals” said Evercore’s Shipley. “I’m not saying that fixing up after disasters doesn’t benefit the economy, but you want to separate them if you can.”