Residential Construction Sector Showing Signs of Improvement Following Slow Recovery

June 21st, 2012 by DWM Magazine

The Associated Builders and Contractors Inc. (ABC) hosted its 2012 mid-year construction forecast earlier this week. Kermit Baker, chief economist for the American Institute of Architects; David Crowe, chief economist and senior vice president of the National Association of Home Builders; and Anirban Basu, ABC chief economist, provided differing projections for construction industry sectors, which has experienced a slower than usual economic recovery.

According to Baker, overall the construction industry has taken a hard hit in previous years for multiple reasons and while nonresidential building has not improved, there is some progress for residential construction.

Additionally, increases in corporate profit, consumer confidence, and both fundamentals in the commercial market and architecture billings index (which measures design activity via surveying architecture firms) has shown improvement.

“The construction sector, unfortunately, is the last major sector in the economy yet to recover from this economic downturn we’ve been through,” Baker said.

According to Baker, although residential trends are showing some improvement, the number of distressed properties remains elevated with loan payments that are past due and in foreclosure relatively high and the net household growth dominated by renters.

“During the housing boom, we saw strong rates of household growth—well over 1 million and a half of new households being formed a year,” Baker said. “Most of this growth was owner households and as the housing bubble burst the number of net households declined from under a million a year from 2005 to 2007, down to about half a million a year during the latter part of this decade.”

Baker said the home improvement industry approached $300 billion last year. Peaking in 2007 at $326 billion, he says he expects to see continual recovery throughout the rest of this year.

He said although architecture billings are still weak, figures have been generally positive in recent months and the recent upturn has been driven mainly by strengthened commercial/industrial project activity.

Overall, Baker said some construction sectors will make progress this year: total nonresidential construction spending is expected to increase to 6.4 percent in 2013 from 2.1 percent this year; commercial construction spending will increase to 11.4 percent from 5.6 percent; industrial will increase 10.2 percent from 6 percent; and institutional will increase to 3.6 percent from -0.1 percent.

Crowe said he expects the overall recovery to be relatively slow, by standards of a typical recovery, throughout the rest of 2012 and into next year.

“We are seeing low 2 percent growth rates for the next couple quarters in 2012 and then a gradual increase in 2013 at over a 3-percent growth rate,” he said.

Crowe said one reason for the slow growth rate is the low level of employment.

“It’s a dismal recovery from the standpoint of creating jobs,” he said. “We’re expecting to see sales of new homes pick up a bit. I am beginning to see small improvement and once we get homes going we’ll get single-family starts going.

Crowe said he expects 2012 to have a little more than half a million single-family starts sold.

“Now that’s not great—one and a half million is a normal amount but it’s still better than it has been,” he said. “On the multifamily side we’re getting a little better response on our quarterly indexes there. It had a 56-percent increase in starts for 2011.”

Multifamily homes will further increase this year although the upward shift will not be “quite as dramatic,” he said. The third sector is remodeling and it also has shown improvement.

According to Crowe, the single-family market is lagging the most. The demand for rentals has increased in recent years while single-family units were still being built.

“We have a lot of other uncertainties out there that are providing doubt in people’s minds about what is going to happen next and therefore there is a reluctance to move forward,” Crow said.

According to Basu, the slow recovery within the construction industry is fairly simple.

“The way I view it is construction equals capital times confidence times well-behaved construction materials prices,” he said. “We have pretty well-behaved construction materials prices. We have capital in the broad economy. In other words, banks have been re-capitalized to a large extent and we certainly have a lot of money sitting on corporations as everyone knows. What we lack is confidence.”

The pace of job growth has also not accelerated but actually decelerated. Basu said he attributes much of this to a “wait-and-see mindset” or lack of confidence.

According to Basu, no sector of the economy has lost more jobs than the construction industry since December of 2007, which is still down about 2 million jobs. Additionally, he said while GDP “continues to be soft, the construction share of GDP has really, really fallen certainly since the peak years.”

Basu added that the 2012 forecast for construction sectors has been expected to gradually improve and then accelerate in 2013 but he said because of low confidence, this is debatable for the allotted time frame.

The wave of uncertainty is based on a number of factors, including: the European debt crisis; the debt ceiling; and healthcare and job creation to produce sufficient amounts of risk-seeking capital to drive construction, according to Basu. Other factors that might affect the industry include public budgets, which remain constrained; policymakers are still cautious, and public-private partnerships are increasingly important but many barriers to substantial progress exist but material prices have improved, he said.

“It’s the lack of confidence among capitalists that is the barrier to recovery,” Basu said. “My sense is that capitalists will become more scared in the months ahead so [with regard to] the semi-positive forecast for 2013, I’m not necessarily a buyer of that.”

 

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