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July 29, 2015 02:00 AM

Residential construction continues to steadily improve

Bill Wood
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    At the end of last year, I forecasted an annual increase of 15 percent in the total number of new houses started in 2015. With six months already in the books, this forecast still looks to be spot on. If my forecast holds, then we will end up with a starts total of just over 1.15 million units this year. Not a very good year by historical standards, but solid progress from where we were just a few years ago.

    One factor that gives me great confidence in my forecast is the trend in the data on permits issued for new houses. When it comes to forecasting residential construction activity, the number of permits issued is the very definition of a “leading indicator.” So every month the Census Bureau includes this permits data in the same report as the starts data.

    The total number of permits issued in the month of June jumped 30 percent when compared with the same month in 2014, and the total from the first half of 2015 is up 16 percent when compared with the same period from last year. Not every permit turns into a start, but this trend suggests that residential construction activity should accelerate gradually during the second half of 2015.

    One emerging trend that suppliers of building supplies should watch closely is the more rapid rise in the number of multi-family structures started when compared with single-family structures. The American Dream always has been to own one's own home, so in the past the single-family data was always the most important. But this appears to be changing.

    So far this year, the total number of new single-family units started is up 9 percent over last year, while the total for structures with five units or more is up 15 percent. The changes in these data are corroborated by the facts that both home ownership rates and vacancy rates for rentals are at historic lows. These trends are partially the result of the lack of access to credit for many households, but they are likely also the result of a long-term, secular shift in preferences for a new generation of households. Single-family houses typically need more construction workers, more land and more building materials per unit than do multi-family structures, so this trend is significant if it persists.

    This trend is most pronounced in the regional data. The total number of new houses started in the Northeast region is up a robust 30 percent for the year to date, but the total number of single-family homes started is actually down by 6 percent. This means that the number of multi-family units has jumped by 63 percent in the Northeast. In the West region, the number of single-family starts is up by 14 percent when compared with last year while the number of multi-family starts is up by 27 percent.

    Single-family houses are still preferable in both the South and Midwest regions, but that is about the only thing these regions have in common. The South has experienced a 9 percent increase in total starts this year, with a 12 percent rise in single-family units. Conversely, the year to date totals for both single and multi-family starts have actually decreased in the Midwest region when compared with the same period last year. Single-family starts are down 2 percent, and multi-family starts have dropped 20 percent from when compared with 2014.

    I would be surprised if there are any manufacturers of building supplies who are not already aware of the general trends in these data, but you should also pay close attention to these trends if you are a processor that sells into any consumer market. That includes not only appliances and home furnishings, but also things like autos, lawn and garden, and sporting goods. You see, if it is a good time to build or buy a new home in America (or a region of America), then it is also a good time to buy almost anything else.

    Rising residential construction activity generates a significant number of new jobs, so this is an engine for economic growth. But the importance of these trends runs even deeper. Only about 1 percent or 2 percent of the total number of households in this country will actually move into a new domicile this year, but history shows that the trends in the residential construction and real estate data are powerful and reliable leading indicators of all kinds of consumer activity.

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