Looking back, there's no question that the residential market has had one heck of a run the past decade — each year defying predictions from scores of construction analysts and economists that next year will finally be the year for single-family housing construction to slow down or at least level off. With forecasts that seem more like a broken record than a revelation, this sector has continued to overcome the odds year after year when you pit prediction against performance. When you consider the fact that this vertical market realized close to a 10% average annualized growth rate over the past 10 years, this niche should be revered as nothing short of phenomenal.
Posting approximately 1.600 million units or 3% growth for 2005, according to McGraw Hill Construction data, single-family housing enjoyed another banner year. In fact, the total residential market expanded to nearly $596 billion, reports FMI Corp., Denver. But can the sector continue at this record-breaking pace?
Once again, most experts utter a resounding no. With 30-year fixed mortgage interest rates edging up to a projected 7% in 2006, after a rather long stint under the 6% mark in 2005, McGraw Hill anticipates single-family housing to slide 5% to 1.525 million units in 2006. Regionally, McGraw Hill is calling for a reduced pace of construction in all regions in 2006, except for a modest jump in the South Central region — an area that stands to benefit from post-hurricane rebuilding efforts. On the other hand, the Northeast and Midwest are poised to decline between 2% and 5%; the South Atlantic is expected to post around a 5% dip; and the West may drop 9% from 2005 numbers. But that doesn't necessarily mean residential as a whole will surrender its top spot as the construction industry's star performer. Taking the place of single-family housing as the cash cow may be income properties and multi-family housing (to be covered in next month's issue).
The U.S. Department of Commerce predicts a 6% increase in residential construction in 2006. Although 6% is a healthy number, it pales in comparison to last year's 14% gain. The National Association of Home Builders (NAHB), Washington, D.C., predicts single-family housing starts to decline 6.6%, from 2.05 million units in 2005 to 1.59 million units (see Figure above).
Although most industry analysts predict a slowdown in residential construction, with some even forecasting negative growth, FMI has released one of the more optimistic forecasts around. In its “2005-06 U.S. Markets Construction Overview,” FMI estimates that the total value of single-family housing construction put in place will reach $415.7 billion in 2006 (a 6% increase from 2005), and the total value of residential construction will hit $632 billion. At this level, new single-family construction will represent two-thirds of all residential construction and 36% of the total U.S. construction market.
Average square footage is also on the rise. According to the report, the average square footage of new homes has increased dramatically over the past 20 years — from 1,780 in 1984 to 2,100 in 1994 and up to 2,350 in 2004. However, retiring baby boomers — many of whom may opt for smaller homes in the near future — may eventually reverse this trend.
“Our forecast is for put in place construction, not starts,” clarifies Heather Jones, a construction economist with FMI. “While we believe that the number of starts will decrease slightly, put in place construction will continue to increase.”
According to Jones, single-family housing will continue to increase total construction; however, nonresidential construction will outpace residential construction for the first time since 2000. What will the major trends prove to be in single-family housing for 2006? Most experts cite rising interest rates, equipment shortages, and rising labor and material costs as significant factors.
“Residential construction put in place will continue to increase due to rising material and labor costs, upgrades and use of higher end materials, and increasing square foot size,” says Jones, who maintains that the housing market will remain strong for the foreseeable future. “A slight decline in starts is not very problematic. Around, or just below 2 million starts is still a very strong housing industry.”
For example, approximately 2 million new single-family homes will be needed annually for the next 10 years just to keep up with immigration and population growth, notes Jones. “Consumers will continue to prop up the economy, but business spending will now lend a hand,” she says. “Business spending means more jobs, which in turn means more housing.”