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U.S. construction market: prospects for 2017

by Donato Grosser

florida-home-for-sale-800px

U.S. residential construction market is made up of two main segments: new residential construction, the most important sector for ceramic tiles, furniture, electrical appliances and other house products; and new home sales, generating home improvement spending.  Existing-home sales have helped in limiting damage during recession as, while new homes construction had fallen by about 70%, home improvement spending had only decreased by less than 30%.

Existing-home sales
The National Association of Realtors, the association of existing-home sales mediators and agents, published on Feb 28th a report stating that in Jan 2017 existing-home sales reached 5.69 million units, the highest level since 2007. This bodes well for the positive trend in the industry which may continue all along 2017.
In practice, housing demand remains high; and increase in employment rates and incomes bodes well for the future. According to the National Association of Realtors, in 2017 sales are expected to rise by 1.7% compared to 2016 levels. The average price of existing homes has risen by 7.1% compared to last year, reaching $228,900. Yet it should be noted that housing supply in the market has dropped by 7.1% compared to January 2016, down to 1.69 million units. This is the twentieth consecutive drop. At the current rate it would take 3.6 months to sell the available housing stock. Generally speaking, when it takes less than 5 months it means that supply is inadequate and we speak of “tight market”. In January the average selling time for a house was 50 days. The chart below highlights the ”widening gap”, that is the growing gap between sales and the supply of existing homes.

widening gap

Home improvement industry
As mentioned above, sales of existing homes are the key factor behind home improvement spending. According to what reported on Feb 20th by the Harvard Joint Center for Housing Studies, home improvement spending is expected to rise over the next few years until 2025. These forecasts are based also on demographic factors. The Harvard model believes that most of home improvement spending will come from aged owners who will need to adapt their dwellings according to their age and changed needs. To that extent there exists in the United States a print magazine called “Environments for Aging”, whose articles focus on design trends for senior living communities. Total home improvement spending topped $340 billion in 2015, beating 2007 records, and until 2025 a 2% annual growth is expected, net of inflation.

New homes
The new residential construction industry hasn’t recovered, and is not back to its historical levels yet.
Before the recession hit, Housing Starts (privately owned new houses) had reached 2.3 million units, too high a figure for sure, stimulated by the positive economic outlook in the first years of 2000 when construction cycles had been extended from 7 to 15 years. The 2007 plummet came as a consequence. According to economists, Housing starts average level would normally be about 1.4 million units. Units have grown from 500,000 to 1.2 million since 2008, a happy result which nevertheless shows the housing industry is still suffering from the crisis.

housing starts and permits

Non-residential construction
2016 has been a wonderful year for non-residential construction. In 2016 expenditure for office buildings grew by 20% while that for hotels by 25%. Spending for retail rose by 10%. But construction of industrial buildings has been weak, and that of institutional buildings (schools, hospitals, government- and culture- related buildings) disappointing .
The market is rather uncertain at the moment because of the new government’s lack of direction. The greatest impact on construction industry comes from proposals to strengthen investments in infrastructure, whose effects could be decisive since demand for labour and construction materials for roads and bridges would create further pressure on residential and non-residential construction.
Healthcare accounts for 10% of total US construction spending. Therefore the promised bill to repeal or modify Mr Obama’s health law could lead to important results as far as  medical buildings are concerned.
President’s Trump promise to eliminate regulations will bring advantages to the industry. Even though the federal government can’t make state governments reduce regulations, any action reducing government participation is bound to bring positive effects.
As to Trump’s promised tax reform package, any semplification and reduction of taxation will lead to more available capital to invest in the industry. On the other hand, limiting trade with other countries would increase the cost of construction materials, while limiting immigration would reduce the number of people available for work, since construction mostly  relies on immigrants for its labour.

long-terms interest rate

 

Obstacles to the industry’s expansion
The main obstacles to the expansion of the construction industry are enhanced costs of construction materials and higher interest rates. In 2106 the price of wood, concrete and gypsum registered an increase which was higher than those of products listed in the consumer price index (+1.3%). The price of wood for construction purposes increased by 8.7%, that of concrete by 3.5% while gypsum increased by 5%.
The rise in interest rates is already showing its negative impact on the housing sector and on new residential construction. As shown in the figure above, after the presidential elections interest rates on house mortgages (mortgage rates) reached 4% and over, and they are expected to moderately continue to rise along with any interest rates increase the Federal Reserve should implement.

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