After yet another slow spring this year, with our industry once again heckled by an improbably wet and cold start to the ready-mixed concrete selling season, we have learned from a recent National Association of Home Builders (NAHB) report that multiple factors continue to hinder the growth of new housing starts.
First, let’s look at the overall health of the jobs market. In June, payroll employment improved by 288,000. May was the first time total employment surpassed the pre-recession peak. Factoring in population growth, unemployment continues at an above-average 6.1%, so job growth still has a ways to go.
In the housing industry, home builders and remodelers have added 106,000 jobs in the 12 months through June, and the seasonally adjusted construction sector unemployment rate now stands at 8.9%, down from 11.2% a year ago, and an astounding 22% at the post-recession peak. Still, labor shortages exist across all job classifications related to housing construction, and are becoming increasingly difficult to fill.
In addition to labor shortages, an important industry headwind remains the lack of building lots. A recent NAHB survey indicates that 59% of builders report “low” or “very low” lot supplies in their markets. This is the highest rate since the question was first posed in 1997, and is notable given that housing starts remain below normal levels of market production. NAHB surveys continue to suggest relatively tight conditions for land acquisition and development loans used to finance lot development, although recent FDIC data suggests that lending is increasing.
Overall, the housing market continues to improve. The NAHB/First American Leading Markets Index remained at 0.88 for the nation from May to June, up 6 points from 0.82 in June 2013. The index measures progress back to and beyond normal economic and housing markets for 351 metropolitan areas. The 0.88 indicates that the nationwide average of housing activity is running at 88% of normal. Three of 10 metros saw a monthly increase in their individual indexes and 83% have seen an increase in the past year.
Markets that have surpassed their previous level of normal are concentrated in energy-producing markets and were more stable. While the industrial Midwest and the “sand states” are still only two-thirds of the way back.
While single-family home starts are slowly recovering market-by-market, don’t minimize the impact that multifamily housing will have on the overall new-starts market, and for years to come. Multifamily spending is growing at almost double the rate of single-family. The relatively strong performance by the multifamily sector is consistent with the most recent NAHB Multifamily Production Index, which increased three points to 53 during the first quarter. This marks the ninth consecutive quarter of a reading above 50, which indicates that more respondents report improving conditions than don’t. Market absorption data for rental and for-sale multifamily remained strong at the start of 2014 as well.
We have historically formed about 1 million new households a year, and while that number plunged to around 600,000 at the height of the recession, it is growing again. The millenials that are the biggest force in new household formations don’t have the same view of single-family home ownership that their parents did, and have only witnessed single-family homes as a risky investment. For them, renting is a safer option. We can expect this cultural swing to persist until there is another round of single-family home appreciation across all markets, which may take years to materialize.
The housing industry needs to fill job vacancies, create new lots, and capitalize on falling unemployment for the recent growth in new housing starts to accelerate.