Is Construction Facing a Downturn, or Is It Just a Pause?
Download MP3Focus: Analyzing the current state of building permits, home buying trends, and the overall construction market.
There is a lot of misinformation surrounding building permits and construction, with claims suggesting a significant crash in home building.
Key Points:
- A headline from the Orange County Register claims California building permits dropped by 29% as home buying and rents cool, with October being the seventh slowest month for permitting since 2015.
- This might initially suggest a massive crash in home building, but let's examine the numbers closely.
Detailed Breakdown:
- October 2023 being the seventh slowest month for permitting since 2015 means there have been seven months slower than this in the last seven years (once a year).
- Looking at actual building permits:
- 2018 (a significant year for construction) saw 7,000 permits in October, and 7,168 permits in 2022—almost identical.
- Permits fluctuate seasonally, with October typically being slower.
- Even with a 29% drop in October 2023, permits are still higher than pre-2018 levels.
Demand for New Housing:
- While permits are down, the need for new housing remains. The U.S. is still facing a housing shortage of approximately 5 million units.
- Affordability is a key issue, but the demand for housing, whether new, remodeled, or reconstructed, persists.
Building Permits and the Market:
- Builders are shifting away from speculative home building due to uncertainty about whether buyers can afford high mortgage rates (8% on a $400,000 house).
- Builders are likely focusing on homes for buyers who need them, rather than speculative builds.
Costs and Affordability:
- Even with a decrease in lumber prices, construction costs are still above 2018 levels, and mortgage rates are a major factor affecting buyer affordability.
- With higher mortgage rates, home equity loans (HELOCs) for remodeling are also more expensive, potentially decreasing remodeling activity.
What Does This Mean for the Future?
- Although permits may have decreased by 20% in 2023, the overall trend over the last few years still shows growth.
- The real question is how many new homes will be constructed year-over-year. If construction slows significantly, it could lead to a housing shortage in the coming years, resulting in more homelessness or rent disadvantaged individuals by 2025 or 2026.
Conclusion:
- While the home building market is experiencing some slowdowns, it is not necessarily a crash. Builders may be adjusting to the current financial environment, but the need for housing remains critical.
