Tight labor market holding back residential construction growth

I am compelled to borrow a line from "The Big Lebowski" this week because my outlook for activity levels in the residential construction sector contains "a lotta ins, lotta outs, lotta what-have-yous."

I will start with the basics and then try to explain some of the nuances that could be significant for suppliers of plastic building materials.

According to the Census Bureau, the total number of new houses started in June was 117,500. This figure was slightly below the total for May, but it was 5 percent stronger when compared with June 2018. This was the greatest number of new starts in the month of June since 2007.

But one month does not make a trend, so we need to step back to gain more perspective. The total number of new houses started in the second quarter was strong by recent historical standards, but it was slightly below the total from last year. For the year to date, the total for the first six months of 2019 is still 4 percent lower than the comparable period in 2018.

So, the totals for both the month of June and the crucial second quarter were good, but the near-term trend in the data remained flat-to-down.

I expect this sideways trend to continue through the second half of this year. My latest forecast calls for an annual total of 1.25 million starts in 2019. This is just a whisker below the total from 2018, and this would represent the first annual decline in the overall total in the past 10 years.

But the difference between last year's total and my forecast for this year is so small that a slight increase in the total for 2019 is well within the range of the forecast error. If we do manage to finish this year with a gain, then it will mark the 10th consecutive annual increase in total U.S. housing starts.

The small changes in the overall data this year mask greater variances in the data from the four census regions. There are also large divergences in the growth rates for single-family and multifamily units. These diverging growth rates stem from the long-term trends in both the locations and the types of units that consumers are demanding.

The South region is still the largest and fastest-growing part of the country for new residential construction. This region accounts for about 55 percent of all new houses started in the United States. The overall starts total for the South is up about 5 percent so far this year, and that breaks down to a small gain of 1 percent in single-family units and a jump of 17 percent in multifamily units. It bears mentioning that the South is the only region to post an overall gain in housing starts so far this year.

The residential construction levels in the other three census regions have declined. The Northeast is the smallest region in terms of the overall number of new houses started. It accounts for only 8 percent of the U.S. total, and it is also experiencing the smallest decreases. Starts of single-family units are down more than 13 percent, but multifamily starts are up 4 percent.

The Midwest region accounts for 12 percent of the national total. This total for single-family units from this area is down 10 percent from last year, and the multifamily total is down 14 percent.

The region suffering the greatest declines so far this year is the West, which represents 25 percent of the national total. Single-family starts in this region are down more than 13 percent, and multifamily starts have dropped 19 percent.

For most of my career as a plastics industry analyst, the trend in the housing starts data was the preeminent indicator of overall U.S. consumer demand. It was a crucial leading indicator for the plastics building materials industry and also the overall U.S. economy. So, the declines in the regional starts data this year, particularly in the West region, would normally indicate not only waning demand for building materials in these areas, but perhaps even a pending economic recession.

Fortunately, that is not the case this time. Based on my analysis of the regional labor statistics and the regional data on home prices, I believe the current trend in the housing starts data is being suppressed by supply constraints rather than waning demand for new houses. The problem continues to be a tight labor market for residential construction workers. The rate of new hires in this sector is at a cyclical low point, while the number of job openings is at an all-time high. This means that the unemployment rate for these workers is near an all-time low.

On the demand side of the market, it is fair to state that home prices have been steadily rising for the past 10 years, and this has produced issues with affordability in some areas of the country. I think this is especially true in many parts of the West region. However, recent data indicates this problem is gradually diminishing. Mortgage rates have declined steadily this year, and the rate of increase in home prices is decelerating.

At the same time, U.S. wage and income growth is gradually accelerating. If all these trends in both the supply and demand forces are sustained, and I believe the most probable outcome is that they will be sustained for the foreseeable future, then new homes will slowly become increasingly more affordable for a rising number of buyers.

The struggle to find workers will continue to vex builders in some parts of the country, but overall, the U.S. housing starts data will soon get back to a gradual trend upward.