No boom for construction, but steady growth

It is not exactly what I would call exciting, but the residential construction sector continues to chug along at a steady pace. The seasonally adjusted, annualized total for new houses started in June was 1.19 million. This represented an increase of 5 percent over the total for May, but it was a decline of 2 percent when compared with the June total from last year.

For the first half of 2016, the total number of housing starts is up 7 percent from the same period in 2015.

This is preliminary data, so it will be revised a couple of times in the coming months. But barring a large revision, the June data for the total number of U.S. housing starts was close to my expectations. Nevertheless, after weighing all of the factors, I have lowered my forecast a bit for this year. This revision to the forecast does reflect any real change in my overall opinion about the residential construction sector. I would call it more of a slight tweak.

The revised forecast now calls for an increase of 8 percent in the total number of houses started this year when compared with 2015. The 2015 total was a little over 1.11 million, and a gain of 8 percent this year would push the total up to 1.2 million.

As the graph indicates, this is still well-below the pre-crash levels. But it is a strong and stable level that can be sustained indefinitely. New construction activity has increased over the past seven years in a manner that has been reliable, but the industry has not experienced a “boom.” I will argue that this is good for a lot of reasons.

For instance, mortgage rates remain quite low, yet the overall credit quality of those getting mortgages is quite high. Materials and diesel costs are also relatively low and stable as well. And there is a strong level of new construction projects in the pipeline. In other words, the residential construction sector is functioning in a manner that could best be described as healthy. Now that I think about it, strong and stable for an extended period is actually pretty exciting for the processors that supply this sector.

As always, there are some interesting trends that emerge when you look at the breakdowns of the housing data. One is that the pace of growth for multi-unit structures appears to have cooled considerably this year. In 2015, the annual total for multi-family starts increased 12 percent over the previous year. But in June of this year, the total number of multi-family starts plummeted 24 percent when compared with the same month from 2015, and for the year-to-date, total multi-family starts are down 4 percent.

So has market demand for multi-family dwellings been sated, and single-family structures will now return to the traditional position as the predominant driver of growth?

I don't think so. A closer look at the data shows that the decline in the multi-family data is almost entirely due to a sharp drop in the Northeast region. The Northeast is the smallest region in terms of total residential construction activity, and it also is experiencing a long-term decline in total population. There was a sharp spike up in multi-family units in the Northeast last year, so a drop this year is most likely a reversion to the mean rather than an indicator of a sustained trend.

Fluctuations in the near-term data notwithstanding, I believe that the demand for multi-family units will more than keep pace with the single-family demand. In recent years, home ownership rates and vacancy rates for rental properties have drifted downward to historically low levels. I do not think that this is a short-term or cyclical trend that will eventually be reversed. Instead, I believe it reflects a secular shift in the way future generations will consume living space. The dream of owning your house with your own car in your own garage does not burn as brightly for millennials as it did for baby boomers.

Tiny houses?

The transition to the shared economy is real, and the tiny house movement is gaining momentum. I cannot predict these trends will last forever, but I will say that they are more than passing fads. And this will affect a wide array of future consumer choices such as the locations of where new homes are built, the kind of materials that are used to build them, and the type of furnishings that are put inside them. The time when demand from baby-boomers spurred steady increases in things like square footage, the number of bathrooms, and in-home entertainment are likely over.

One crucial demographic trend that will accelerate for the foreseeable future is the increase in household formations. This forecast is based on the fact that millennials are just starting to enter the prime age for household formation. The formation of a household is a crucial step upon which most Americans build their patterns of consumption. Just be prepared for the fact that the households and spending patterns that are formed by this new generation will likely differ in many ways from those of their parents.