By Daniel LoBue, Tego Systems Corp.
| Since our last article in the June/July 2022 issue of ProInstaller, the U.S. economy has been an ever-changing landscape as the Federal Reserve has committed itself to bring high running inflation under control and has significantly tightened its monetary policy. The U.S. construction industry, in particular the residential markets, have started to respond accordingly. We will discuss in more detail how each construction segment (residential, commercial and public) has been affected. We are using current (Oct./Nov. 2022) data from the U.S. Census Bureau instead of the revised data we typically use. The shifts have been significant in a shorter period of time, and capture the real-time changes in the market. |
Residential Housing Construction
| Single-family housing completions stood in November 2022 at 1.047 million units—a 16% decrease compared to November 2021. Total construction spending in residential housing has risen to $887 billion—an increase of 8%—and despite construction inflation still being at historical highs, the sector is trending flat.
Likewise, residential building permits have started to cool off significantly at an annual rate of 828,000—a drop of more than 20% from last year—and are now at early 2019 levels. The cool-off from the unusual growth from 2020 and 2021 stems clearly from the high construction inflation which has priced many prospective buyers out of the market. On top of that, the sudden increase in mortgage rates has pushed many buyers to the sideline. This has given multifamily development quite a boost, as builders in anticipation of the effect of high construction inflation have ramped up production significantly. Multifamily now stands at 600,000 units, which is the highest on record. Despite the correction from the incredible highs from 2021, based on all leading indicators (including the high credit quality of current homeowners and their significant increase of home equity) we estimate the baseline in the housing economy to remain robust going into 2023-2024. |
Commercial (Non-Residential) Construction
| Due to pent-up demand from the pandemic and society resuming a more normal life, commercial construction has seen a significant rebound and has now grown 5% in 2021 and more significantly in 2022 by a solid 10%. It has grown from $488 billion in 2021 to $538 billion, which is a 11% increase with a net growth of at least 4% above the current inflation of 7%. Despite the economic environment still pointing to a recession in 2023, we have updated our outlook to be moderately optimistic for continued growth in the commercial building space for 2023. |
Public Construction
| Public construction has started to tick up again in total dollars spent at $373 billion. The public sector is starting to noticeably profit from the $550 billion infrastructure bill. This trend will continue for years to come, continuing to drive growth in this segment.
While the U.S. construction market continues to face economic headwinds, there are multiple counter trends that will maintain a very solid baseline. To put things in perspective, the total construction spending in the U.S. went from $1,655 billion in 2021 to $1,800 billion in 2022, an increase of 9%. At current inflation readings, this translates into real nominal growth of at least 2% year over year. Considering high domestic inflation and the turmoil surrounding the Ukraine invasion and its ripple effect across all sectors of the economy, the construction industry and U.S. economy continue to be very resilient. |
Inflation, Geopolitical and Supply Chain Concerns
| We believe that the Federal Reserve is unrealistic in its goal to reduce inflation back to 2% within a year’s time and estimate that long-term inflation will remain after all monetary policies are executed, between 3.5 to 4%. It will take a long time to absorb the near 50% government debt increase we incurred during the pandemic. For inflation to cool off to these levels will take at least through 2023, and the Federal Reserve will not reverse its tightening monetary policy until the end of 2023 and possibly not until 2024. As a direct consequence the market likewise will adjust to paying higher interest rates on mortgages and business will continue as usual. For sure we got shell-shocked in 2022, but as we can see the construction market has proven to hold up quite well.
Regarding the impact of the Ukraine invasion, there seems to be no end in sight. The international community has been fractured on its responses and to some degree has run out of steam on how to deal with the confrontation. Unfortunately, we are expecting for the tragedy to continue for years to come and keep world politics polarized. With that in mind, we do not see that energy costs can be significantly reduced. Current geopolitical events and in the light of the world’s efforts to reduce its dependency on fossil fuels (which is an expensive transition), upward energy pricing pressure will be persistent for the coming decade. Until new energy sources and infrastructure have been adopted on a large scale, and assuming the transition takes at least 10 to 15 years from today, we expect energy prices of any kind to stay at current prices if not higher, which will keep goods, services and transportation costs at elevated levels. International supply chains have been steadily improving and we expect that to continue into 2023 and beyond, which will have a positive impact on the economy at large. |
Outlook for 2023
| In spite of high housing and construction costs, the market is going to remain short anywhere from 2 to 4 million homes due to a decade of lackluster building activity following the housing recession of 2008. This ongoing shortage will keep prices for housing at current levels and maintain solid activity in the existing home sales market. As single-family homebuilders have been reducing their projects significantly, we update our previous forecast from a decline of 10-15% to 15-20% compared to 2021. During 2023, homebuyers will adjust to accept higher mortgage rates as low interest rates will be in the distant past and wage growth will start to catch up with inflation easing the monetary burdens of increased mortgage rates. This will eventually cause an acceleration of new housing developments.
The U.S. always seems to weather the storms and adapt faster than any nation in the world. We expect multifamily, commercial, and public construction to continue humming along and grow respectably into 2023. People need to live with a roof over their heads and, therefore, new multifamily construction will continue to grow while single-family home construction will decline and renovations in turn will go up as homeowners will upgrade their dwelling space. Between the three dynamics we strongly think this sector will fare much better than what is currently anticipated. Pent-up demand will continue to drive commercial construction, contributing to its 2023 growth and remaining solid. The $550 billion infrastructure bill has already had a significant impact on growth, which will continue until the bill’s funding has been exhausted. We are cautiously optimistic in the short and long run which has been our view of the U.S. economy at large. We are looking forward to discussing developments and our updated outlook in six months to come. |
Editor’s Note: No portion of this article shall be used without the written consent of Tego Systems Corp. and ProInstaller magazine.
A link to the graphs from this Market Study:
