Fact or Feeling?

Annual Builder Developer Luncheon provides a balanced perspective.

At the 16th Annual Builder Developer Luncheon on February 28, a full ballroom of attendees was on hand to hear from local and national experts. The event’s speakers offered statistics, opinions, and expectations for the economy and construction industry in particular.

As always, the three speakers addressed the overall economic situation, the real estate and construction industry in particular, and the local market specifically.

The Economic View

Danushka Nanayakkara-Skillington, the NAHB Assistant Vice President for Forecasting and Analysis, opened with a presentation that offered both a macroeconomics perspective and an industry-specific outlook, as well as a forecast of the year or so ahead. She skillfully balanced cold numbers with sound analysis, separating feelings from facts.

In her overview of the current economy, Nanyakkara-Skillington highlighted some key statistics: There are currently 11 million open jobs in the U.S., two for every unemployed individual. Housing is 42% of the Consumer Price Index (CPI), the largest factor affecting its rise. Consumer credit card debt is at a 20-year high. Student loan debt totals more than $1.6 trillion.

Every one of those statistics has a direct effect on the construction industry.

Of those open jobs, nearly half a million of them are in the construction trades. The cost of housing not only affects CPI, but home sales in general. At current prices, only 38% of homes are affordable for the average buyer. With consumer debt at current levels, potential buyers are either delaying home purchases or are unable to afford homes on the market today.

“If you took Economics 101 in college, you know that two consecutive quarters of decline is the classic definition of a recession,” she said. “But despite that reality in 2022, no declaration of recession was made.”

Because labor has remained strong and unemployment at a 53-year low, she said, the Fed was not inclined to qualify the current economic situation as a recession. “The economy has continued to slow, though, with many sectors declining, so I anticipate a recession to be called by mid-2023.”

Single-family construction statistics support that prediction. Nanayakkara-Skillington said, “Single-family starts declined over the past year. We would expect that rate to be 1.2 million units annually, but it’s currently at 700,000 units.”

She said that’s one reason builder confidence is down and why more than 50% of builders state that they have to give some sort of incentive to retain buyers.
And all of those factors have led to a decrease in permits in 48 states over the past year.

Despite these facts, Nanayakkara-Skillington said they shouldn’t provoke feelings of doom. “There are positive signs. Multifamily construction has recovered, with the highest level under construction since 1973.” In addition, despite the number of open jobs, unemployment is actually at a 53-year low, back at prepandemic levels.

“Monetary policy has been tightening in response to all these factors, and the Fed is aggressively trying to target inflation,” she said.

By the end of the year, Nanayakkara-Skillington expects the effects of those changes and natural adjustments in the economy to bring about signs of growth.

Real Estate, Construction Perspective

Andrew Warren, Former Director of Real Estate Research for Price Waterhouse Coopers (PwC), followed with “Emerging Trends in Real Estate.”

The result of an annual survey of 1,700 respondents, 1,000 in-person interviews, and dozens of focus groups, the 44th annual report Warren summarized indicated concerns facing the marketplace as well as promising signs.

The consensus from most respondents indicated a “new age of uncertainty,” Warren said, with some of the concerns facing the construction market including labor, inflation, material cost and availability, and changing interest rates.

“The availability of capital is also a slightly greater concern for most respondents than it was last year,” he said, “whether it’s development funds or refinancing sources.”

Overall, the responses to this year’s survey led Warren to some optimistic conclusions. “We expect a period of long-term interest rates adjusting to average closer to 4–5%,” he said, “which is actually more like historic averages. And the market still functions well at those levels.”

Warren mentioned a couple of specific trends that are encouraging signs for the construction industry.

First, almost three years postpandemic, most industries in the U.S. are still doing a mix of work structures: in-office, at home, and combinations of the two. Although some had predicted that this would result in a decreased need for office space, that is not the case.

“Most respondents stated that they were in the office three days a week,” said Warren. “If you’re a business owner, you can’t cut back on office space when your entire staff is still in the office three days out of five.”

And commercial property offers another opportunity for the construction industry. “There’s also a trend toward repurposing commercial properties for residential use, which could provide solutions to the need for affordable housing, among other benefits,” he said.

With the increased number of employees working remotely all or part of the time, home buyers are rethinking their needs. “There’s a trend away from the ‘24-hour city’ life and toward flexibility” he said. “Home buyers are asking, ‘If we can work from anywhere, are we able to live anywhere?’”

That trend has kept Des Moines in the list of growing markets across the country. Major cities, such as Nashville, Dallas, and Atlanta, remain at the top of that list but are suffering growing pains as infrastructure struggles to keep up with residential growth.

The steady but less dramatic growth in Des Moines has limited those challenges. “The long-term success of these housing markets will be based on how they meet the new challenges associated with growth,” Warren said.

The Local Outlook

Closing out the presentations, Kalen Ludwig shared statistics from the 19 communities she tracks around the Des Moines metro area. Those numbers held a few surprises.

“New construction on the market is the highest it’s been in 10 years, but the total number of homes on the market is down,” Ludwig said. Overall, the metro area has about a six-month supply of active listings, considered an indication of a healthy market.

Ankeny remained at the top of the communities tracked, with 23% of sales. Waukee was just behind, with 19%, followed by Urbandale, Bondurant, and Norwalk, all coming in under 10%. (For complete details, visit KalenLudwig.com.)

Ludwig’s statistics offered some key takeaways.

For example, 20% of homes sold in the metro area are typically new construction. But 70% of listings right now are new construction, indicating an unbalanced inventory. Also, total closed sales in 2022 were down from 2019 and 2020, and the total pending sales and sold properties to date for 2023 are down dramatically. “This is not necessarily a concern,” Ludwig said. “Although the number is down compared to the last few years, it’s actually comparable to normal averages.”

The number of permits pulled reflects that change as well, indicating that the construction market is returning to its normal pace.

What remains a concern is costs. “The average new construction sale price increased 16% from 2021 to 2022,” she said. “That’s almost $100,000 higher than the cost for the same home in 2020.”

For home buyers, the higher sale prices combined with increased interest rates results in a monthly payment that’s nearly doubled for the average home since 2021.
Ludwig offered several concluding facts based on local statistics.

She said 2023 will hit the reset button, as indicated by days-on-market as well as current sales and permits. In general, she said, consumers are sitting pretty, with over 50% of U.S. homes holding 50% or more equity. Ultimately, she said, affordability is a math equation that will continue to be determined by interest rates, housing prices, and wage growth.

Finally, she said, Iowa is one of the best kept secrets in the construction industry. “My prediction? Prepare for a strong, robust 2024. We just have to hold on through 2023.”