The Brakes Are On
NAHB economist sees a slowing economy ahead.
A discussion of the economy isn’t typically filled with nail-biting drama. But according to National Association of Home Builders (NAHB) chief economist Robert Dietz, the current U.S. economy is the equivalent of a plane coming in for a crash landing.
On Thursday, September 8, the Iowa City chapter of the Home Builders Association hosted Dietz at its monthly gathering. His presentation included an aerial view of the U.S. economy, as well as a look at Iowa specifically.
With the Federal Reserve tightening interest rates and inflation the highest it’s been in nearly 40 years, Dietz says a recession in the next 12 to 18 months is inevitable. “The plane is going to land hard,” he says. “How hard depends on the Fed.”
Dietz doesn’t expect a crash like that of 2008. But on a national level, the plane is definitely coming down. “That’s not to say there won’t be growth in some markets,” he believes. “Communities that encourage growth, communities that create an affordable environment for builders and developers to work, those communities will see growth.”
After two years of dramatic increases in nearly every sector of the economy, the U.S. saw numbers contract during the first quarter of 2022. Dietz says this was due in part to the artificial economic stimulation from the government’s stimulus program during the COVID-19 pandemic.
“Cash flow increased, but output was reduced,” Dietz explains. “Those two together equal inflation.”
Core inflation, although just beginning to come down, peaked at nearly 9% higher than it was in mid-2021.
Unemployment is another factor playing into the changing market. Two statistics in particular reveal how great a part. First, there are twice as many vacant jobs as there are individuals on the unemployment rolls. Second, the labor force participation rate has been steadily declining since 2000.
“And on top of that already-declining labor force, add the fact that half of those who stepped away from employment during COVID have not returned,” says Dietz.
Despite these warning signs, Dietz doesn’t anticipate a hard landing for the economy. “I expect the Fed to keep interest rates a little higher for 2023, then begin a gradual decrease in 2024 as the economy levels out,” he says.
Dietz isn’t the only expert who’s forecasting this approach from the Federal Reserve. As he explains, “The markets have already anticipated this tightening in the monetary policy, so most institutions have adjusted rates accordingly. Rates aren’t expected to fluctuate dramatically for consumers because of this.”
As far as the construction market is concerned, materials costs and supply issues will continue to be concerns. Lumber prices are coming down from their 2021 peak. However, building materials as a whole are still up about 16% compared to pre-pandemic prices.
Dietz says this is one area the federal government could play a bigger part. “Supply side issues aren’t being addressed effectively.”
Because of increased demand and increased material prices, housing affordability will remain a major issue in the industry. As of late August, only 45% of homes on the market nationally were affordable for the average buyer. That is the lowest percentage of affordable homes in over a decade.
“Iowa continues to have strong population growth and a stable market,” Dietz says, “so I don’t anticipate the same fluctuations here and elsewhere in the Midwest that we’re seeing in some other areas of the country.”
The median price of a new home increased by nearly 40% by early 2022, but prices are recovering to be more in line with inflation and other prices.
Dietz anticipates custom home building will remain stable and that multifamily projects, which have increased more than 15%, will level off over the next couple of years. Single-family projects are down nationally, although strong in Iowa. As the rest of the economy levels out, he expects single-family projects to begin rising again, likely early in 2024.
Long-term, Dietz is watching a couple of potential warning signs for the construction industry—an aging workforce and declining population growth. “In July of this year, there were about 375,000 job openings in the construction industry,” he says. He says twice that number of openings ae added each year as the market grows and workers retire.
Not only is the median age in the industry 41, but a quarter of the workforce is made up of immigrants. Drawing young people to the industry and encouraging sensible and enforceable immigration policies will both be key in sustaining the industry in the future.
“The U.S. fertility rate continues to drop. That will affect not only our labor shortage but the rental markets and the first-time buyer market,” says Dietz.
If population numbers continue declining, there will be fewer first-time home buyers in 25 years, fewer renters, and a smaller pool of workers to fill job openings.
Despite those warning signs and the turbulence of the past 24 months or so, Dietz says the U.S. financial industry has implemented safety practices since the 2008 crash, so brutal decline is unlikely.
Experienced air travelers have learned to expect bumpy landings from time to time. Dietz says economists understand how to deal with that: Planning ahead and avoiding unnecessary risks will make even a bumpy landing less painful.