Residential construction is back to slow-recovery mode

Spring is the peak season for the building and construction sector, and the much anticipated data measuring springtime activity in the residential construction sector is finally starting to emerge. According to the Census Bureau, the total number of new houses started in the U.S. posted a strong gain of 9.2 percent in April when compared with the same month last year. For the year-to-date, the housing starts total is up 5.5 percent when compared with the first four months in 2014.

This solid gain in April mitigates the sharp drop in the data from February, and it puts the running total for this year right back on track to hit my forecast for this year. For 2015, I expect the rolling monthly average in this data get up to 95,000 units per month. This forecast results in an annual starts total of 1.15 million units when the books are closed on this year, or a gain of 14 percent when compared with the total from 2014.

A gain of 14 percent may seem like a pretty big jump, but as the chart indicates, it represents just a moderate acceleration in the steady, but gradual recovery that has prevailed since 2012. Or another way to look at this is that the monthly housing starts data are still coming in at a pace that is down almost 50 percent from the peak in 2005, and they are 25 percent below their pre-boom, long-term historical average.

On a regional basis the April data represents something of a market correction, or what economists call a regression to the mean.

The Northeast total for April spiked upward by 50 percent when compared with the previous year, but this jump was due in large part to the start of projects that were postponed by severe weather. For the year-to-date, the Northeast starts total is flat when compared with last year.

The Midwest total through the first four months of 2015 is also flat when compared with 2014. The South is experiencing decent growth of 5 percent through April, and the West is enjoying a 12 percent gain this year.

All of these regional trends this year are consistent with the long-term patterns over the past few years — the majority of the growth occurring in the South and West, while the totals are flat-to-down in the Northeast and the Midwest.

The one trend in the April data that portends a brighter future is the jump in the number of single-family housing starts. Growth in the single-family segment has lagged the robust gains in the multi-family segment ever since the bubble burst in 2008.

This is the result of a set of circumstances that we may never see again. Consider these facts: the mortgage applications data are at a cyclical low-point despite mortgage rates that are near all-time lows; home ownership rates are near historic lows; and the vacancy rates of rental units are also near historic lows. As for residential real estate market, we are now six years into an economic recovery and sales of existing homes are at the same levels they were at 20 years ago.

So either the U.S. population is declining (not true), the economy is in recession (again, not true), or there is something suppressing demand. I think it is actually a combination of three things. First, it is hard to be a buyer of a new house if you are not also a seller. First-time homebuyers are still having trouble getting financing. The banks are waiting for home prices to appreciate and market activity to increase before they ease lending standards, but prices and activity levels are not able to rise and without more access to capital. So a significant portion the market is caught in a vicious cycle.

A second factor suppressing demand for new housing is a shift in households' willingness to accrue debt.

Household debt-to-income rations are quite low, and the household savings rate is on the rise. Americans have been willing to increase their purchases of new cars and meals in restaurants, but they are holding the line on many other types of purchases, including houses. The willingness to purchase new homes will gradually increase as the nation's earnings and employment data rise. And we can take heart in the fact that upward trends in both of these data are well-established. However, we are also going to have to adjust to the fact that spending patterns have shifted. It will take a few more years of prosperity for them to return to “normal” levels, if they ever do.

And finally, we can blame it on the millennials. This is the largest generation since the baby boom, and they are just now entering their prime home buying years. But as of yet they have shown little interest in being homeowners.

They are starting to form households, but many of these households have demonstrated a clear preference for renting. This could change as they get older, or as credit conditions ease further, or as the fundamentals in the economy continue to improve. But for now they seem more inclined to live at home until they rent a place of their own.

The market conditions and trends that I perceive in the national residential construction data are corroborated by our Plastics News Business Monitor Index for Building and Construction. The index value for the first quarter is 102.5 (a value above 100 indicates an overall increase in business activity). Solid gains in the new orders, production, and employee components were partially mitigated by declines in export orders, backlogs, and prices received.

This value of 102.5 for suppliers of plastic building materials is moderately lower than the 104.5 that is our Index value for the entire plastics industry. But is well worth noting that the building materials sector has higher expectations for the future than the overall industry, and this is reflected in their above-average capital spending plans for this year.

When asked about the top five problems facing their industry, manufacturers of building materials were more worried than other processors about regulatory challenges, issues pertaining to environmental sustainability and the competitive global environment.