The new year rang in bright for homebuilders, says Associated Builders and Contractors (ABC) chief economist Anirban Basu. The association’s Construction Backlog Indicator rose to 8.6 months in December from 8.5 months in November. This is according to an ABC member survey conducted December 20 through January 4.

“Collectively, contractors experienced an uptick in optimism during the holiday season,” Basu says.

But it wasn’t the eggnog.

“Credit conditions eased a bit during the last days of 2023 as the Federal Reserve indicated that its next set of moves will be to reduce borrowing costs,” he says.

That may have made projects a bit easier to finance, leading to a larger backlog and increased optimism about sales, employment and profit margins for the first half of 2024, Basu suggests.

The Southern region posted the largest monthly increase, retaining the lengthiest backlog. Only the West showed a monthly decline.

The growing backlog is just one of several recent measures pointing to a strong outlook for construction in 2024. In December, the National Association of Builders (NAHB) announced that builder confidence in the market for newly built, single-family homes also rose, after reaching its lowest point since December 2022.

“We have a certain amount of acceleration of new home sales activity,” says NAHB chief economist Robert Dietz.

With about half as many existing homes on the market as usual and a deficit of 1.5 million homes in the U.S., it’s all but inevitable that construction will be strong for at least the next five years, Dietz says. By 2026, the industry is expected to build at a rate of 1.1 million homes per year, finally putting a dent in the housing deficit, he predicts.

Even with such fuel for confidence, “Still, there remains cause for concern,” Basu says. “Recent data indicate that wage pressures persist, which makes it more likely that interest rates, and therefore project financing costs, will remain higher for longer.

Geopolitical instability appears to be on the rise, raising the probability of a major conflagration that could further impact supply chains and potentially cause steep increases in certain energy prices.”

Those points may be true, but it’s also important to focus on the positive, suggests Richard Branch, chief economist for Dodge Construction Network. The next six months will be key, Branch says, but there are plenty of indications that the economy can weather challenges over the course of the year.

“I think it’s very easy when you do what I and other economists do, and you’re constantly looking at bad news, to get sucked into that vortex of negativity,” Branch says. “But when you look at the underlying fundamentals of the construction sector, whether that’s demand for single-family or multifamily—there’s a whole lot of positivity underlying the market. And it’s that underpinning of demand that makes me feel fairly positive about 2024.”

For a complete outlook on the economy, housing/construction, renovations and labor, see the Annual Outlook in [DWM]’s January-February print edition. To subscribe to the magazine, visit dwmmag.com and click on ‘Subscriptions’ and ‘[DWM] Magazine.’

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