While debate rages on potential recession, building industry braces for slump
The jury is still out on whether a full-blown recession will emerge, with some economists saying we’re already there while other analysts point to key economic measures that remain healthy enough as to nullify the specific economic decline. One thing is certain, however, according to one pundit: the US construction industry, at the very least, is likely to experience a significant economic downturn.
Adam Graham (pictured), an industry analyst at Fixr.com, is in the business of assessing and writing about the real estate and home construction industries – covering the full breadth of associated topics. Sought after for his analysis, he has been featured in diverse publications from the Boston Globe to Better Homes and Gardens and has also contributed to various outlets such as the National Association of Realtors.
Mortgage Professional America reached out to Graham for his insights on what he believes is going on from a decidedly macroeconomic perspective. Helpfully, he provided a list of five main indicators he sees as evidence of a housing recession to make the issue less of an abstraction (more on that later).
“There are many aspects in play which are contributing to what some are referring to as a housing recession,” he told MPA. “Most of the causes are due to inflation; mortgage rates have shot up this year, building material prices are still high, and we have seen a 54.7% increase in new home prices since the start of 2019.” What’s more, he added: “The Housing Market Index, carried out by the NAHB [National Association of Home Builders], has seen a year low point of 49 in August on their 100-point builder confidence scale. This is a drop from 83 back in January of this year. This is a huge indicator of what home builders themselves believe the state of current construction is in, and the trajectory it is taking this year.”
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The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market according to the association’s website. The survey asks respondents to rate market conditions for the sale of new homes at the present time, and in the next six months, as well as the traffic of prospective buyers of new homes.
A rather sophisticated measure, the HMI is a weighted average of three separate component indices: present single-family sales, single-family sales for the next six months, and traffic of prospective buyers. Each month, a panel of builders rates the first two on a scale of “good,” “fair” or “poor” and the last on a scale of “high to very high,” “average” or “low to very low.” An index is calculated for each series by applying the formula “(good – poor + 100)/2” or, for traffic, “(high/very high – low/very low + 100)/2.” Each resulting index is first seasonally adjusted, then weighted to produce the HMI. The weights are .5920 for present sales, .1358 for sales for the next six months, and .2722 for traffic. The weights were chosen to maximize the correlation with starts through the following six months.
The HMI can range between 0 and 100.
Without further ado, the following are the five main indicators Graham sees as evidencing a housing recession:
- Builder confidence has dropped 34 points on the Housing Market Index from January to August 2022.
- There has been a 57.4% increase in new house prices from January 2019 to May 2022.
- Mortgage rates stand at 5.22%.
- Housing starts declined by 9.6% in July 2022.
- Price fluctuations and increases continue to burden home builders.
Graham said he arrived at the five indicators given the outsized role the construction industry plays on the US economy overall. He said the indictors point to a possible upcoming downturn in this sector.
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“We are already seeing significant declines in single-family home starts in 2022, with a 9.6% month-on-month drop between June and July. Permits issued for such housing construction also declined,” Graham continued. “It would seem that the high cost of building homes is forcing many out of the market, for the time being at least.”
But there are nuances to the analysis that prevent direct comparisons to the Great Recession, he cautioned: “While a construction downturn may be looming, the housing market and wider economy in general is not facing the same conditions that were seen in 2008,” he noted. “The near future may be tough for home builders and wannabe homeowners, but when it comes to interest rates and inflation; what goes up, must come down.”
It’s a compelling argument. To paraphrase Bob Dylan: In the construction sector, it’s not all dark yet, but it’s getting there.
