United States / Analyst Insights
Key Construction Drivers (Part 2): Residential Trends
by Marisa Lifschutz, Lead Industry Analyst
Mar 12 2019

In 2019 single-family residential construction activity is forecast to decelerate to its slowest rate of growth in five years as a result of subdued growth in key demand drivers. Though rising household incomes and other favorable macroeconomic conditions are anticipated to continue to support industry growth, heightened financing, material and labor costs will make delivering projects on time and within budget more challenging for builders and developers. Furthermore, rising mortgage rates and a continued uptick in home prices are anticipated to pressure demand for new home construction as potential buyers face diminished housing affordability. Overall, IBISWorld expects revenue for the Home Builders industry (IBISWorld report 23611a) to expand a modest 1.9% in 2019, bringing total industry revenue to $84.1 billion.

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According to the latest data from the US Census Bureau, privately owned housing starts declined sharply in December 2018, reaching an annual rate of 1,078,000 units, a 11.2% contraction since the month prior. More specifically, the annual rate of single-family housing starts in December declined 6.7% since November 2018. Furthermore, privately owned housing starts declined 10.9% since December 2017, with single-family starts falling 10.5%. Monthly data is generally volatile and subject to significant margins of error and revisions. However, the release of this data was delayed as due to the recent federal government shutdown, which enabled the December 2018 estimates to include late reports and corrections typically associated with the first revision to the estimates, facilitating heightened accuracy.

Key demand drivers

The 30-year fixed rate mortgage, the most-common type of loan for home purchases in the United States, has risen sharply in recent years, raising the cost of borrowing for buyers. The performance of nine of the 35 industries in the Construction sector (IBISWorld report 23) is influenced by changes in the 30-year fixed rate mortgage, which determines consumer likelihood to invest in new properties. Overall, the 30-year fixed mortgage rate is expected to climb 8.1% in 2019, raising financing costs for potential homeowners. Furthermore, gains in the home price index have outpaced growth in household income in recent years, contributing to slowing demand for new home construction. Per capita disposable income, which affects performance for eight of the industries within the Construction sector, is expected to rise just 2.0% in 2019, outpaced by an anticipated 4.5% uptick in the S&P/Case-Shiller US National Home Price Index the same year. However, this trend represents a slowdown in home price growth from previous years, with the gap between wage growth and home price inflation steadily edging downward. 

Meanwhile, the producer price index (PPI) for residential construction inputs rose to 224.1 in January 2019, representing a 1.4% increase year over year. Rising input costs not only affect contractors’ bottom lines, but negatively influence demand for new construction activity overall by adding to the costs of finished homes. Additionally, according to the latest Job Openings and Labor Turnover Survey released by the US Bureau of Labor Statistics, the level of job openings within the Construction sector reached a record-breaking monthly average of 274,000 in 2018, surpassing the previous high of 198,000 (reached in 2017) by a significant margin. This persistent skilled-labor shortage has caused labor costs to soar for operators, making delivering projects on time more challenging and expensive. Overall, the rising costs of construction materials, labor and financing are expected to temper growth in the development of new residential projects in 2019 as builders struggle to generate positive margins.

Industry impact

Decelerating growth for the Home Builders industry will impact upstream and downstream industries across the supply chain. For example, construction materials wholesalers, such as operators in the Lumber Wholesaling (IBISWorld report 42331), Stone, Concrete & Clay Wholesaling (42332) and Roofing, Siding & Insulation Wholesaling (42333) industries, supply residential builders with material inputs, machinery and equipment used during the construction process. Slowing demand from general contractors will result in a decelerated stream of revenue for industry wholesalers, as contractors will require fewer material and machine inputs. Furthermore, upstream specialty trade contractors, such as operators in the Wood Framing (23813), Masonry (23814), Roofing Contractors (23816), Painters (23832), Carpenters (23835) and Paving Contractors (23899a) industries, will similarly be affected by slowing residential construction demand. These specialty contractor industries, which each individually derive over 40.0% of their revenue from services provided to the residential building market, will be subject to subdued demand as a result of a dwindling stream of new projects.

Edited by Sean Egan