Labor Shortages Ease, But Remain Worse Than in the Last Boom

2024-02-23T13:18:30-06:00

With home building volumes lower, labor shortages have eased considerably since record levels set in 2021 but remain relatively widespread in a historic context, according to results from the latest NAHB/Well Fargo Housing Market Index (HMI) survey. The February 2024 HMI survey asked builders about shortages in 16 specific trades. The percentage of builders reporting a shortage (either some or serious) of labor they employ directly ranged from a low of 33% for landscape workers to a high of 65%  for those performing finished carpentry. The finished carpentry shortage was down from 72% in 2023 and an all-time high of 85% in 2021 but remains higher than it was at any time during the 2004-2006 housing boom (when it reached a temporary peak of 58% in July 2005). Most of the labor shortage percentages in the above figure follow a similar historic pattern. In the typical case, most of the physical work required to build a home is performed not by laborers employed directly by the builders, but by subcontractors. As a 2020 NAHB study  showed, builders on average use two dozen different subcontractors and subcontract out 84% of their total construction costs to build a single-family home. The February 2024 HMI survey also collected information about shortages of subcontractors.  The percentage of builders reporting a shortage of subcontractors ranged from 35% for building maintenance managers to 63%  for finished carpenters. For all 16 trades, the shortage percentages for subcontractors and labor directly employed were fairly similar. Averaged over the nine trades that NAHB has covered in a consistent way since the 1990s (carpenter-rough, carpenter-finished, electricians, excavators, framing crews, roofers, plumbers, bricklayers/masons, and painters), the share of builders reporting shortages in February 2024 was 52% for labor directly employed and 51% for subcontractors. The two numbers have not always been this close. After 2012, as housing markets started to recover from the Great Recession, a 5- to 7-point gap opened up between the 9-trade average shortage of subcontractors and labor directly employed by builders, with the subcontractor shortages being consistently more widespread. NAHB’s analysis at the time indicated that workers who were laid off and started their own trade contracting businesses during the Great Recession started returning to work for larger companies—improving the availability of workers directly employed by builders while shrinking the pool of available subcontractors. After persisting for a decade, the subcontractor-direct labor gap finally narrowed in 2023 and disappeared entirely in 2024. The current 9-trade average shortage of 52% for labor directly employed is down from 58% in 2023 and a record-high 77% in 2021 but remains elevated in historical perspective—especially when considered relative to housing starts. During the boom period of 2004-2006, total housing starts were consistently over 1.8 million annually—as high as 2.0 million in 2005. Despite this high rate of construction, the 9-trade shortage percentage never exceeded 45% during the boom. In comparison, the current shortage percentage of 52% occurred against a backdrop of 1.4 million starts in 2023 and an annual rate of 1.3 million recorded so far in January of 2024. ‹ Existing Home Sales Jump in JanuaryTags: carpenters, economics, hmi, home building, housing, Housing Market Index, labor, labor market, labor shortage, subcontractors

Labor Shortages Ease, But Remain Worse Than in the Last Boom2024-02-23T13:18:30-06:00

Credit for Builders Remains Tight, But Tightening is Less Widespread

2024-02-20T14:19:38-06:00

During the fourth quarter of 2023, credit for residential Land Acquisition, Development & Construction (AD&C) remained tight, according to both NAHB’s survey on AD&C Financing and the Federal Reserve’s . However, the tightening was not as widespread as it was in recent quarters. The net easing indices derived from both surveys were negative once again in the fourth quarter, indicating net tightening of credit, but not as negative as they were in the third quarter. The NAHB index posted a reading of -19.7, compared to -49.3 in the third quarter, while the Fed’s index posted a reading of -39.7 compared to -64.9 in the third quarter. Although both the NAHB and Fed indices have been in negative territory for eight consecutive quarters, the fourth quarter 2023 readings were as close to positive as either index has been since the first quarter of 2022. According to the NAHB survey, the most common ways in which lenders tightened in the fourth quarter were by reducing the amount they are willing to lend (cited by 73% of the builders and developers who reported tighter credit conditions), increasing the interest rate on the loans (69%), and lowering the allowable Loan-to-Value or Loan-to-Cost ratio (65%). Meanwhile, results from the NAHB survey on the cost of the credit were mixed.  Quarter-over-quarter, the average contract rate remained the same on loans for land acquisition at 8.31% but increased from 7.78% to 8.12% on loans for land development, and from 8.37% to 8.40% on loans for pre-sold single-family construction.  In contrast, the average contract rate declined from 8.66% to 8.41% on loans for speculative single-family construction. The average initial points paid on the loans declined from 0.86% to 0.71% on loans for land acquisition and from 0.93% to 0.73% on loans for speculative single-family construction but increased from 0.58% to 0.60% on loans for land development, and from 0.86% to 1.08% on loans for pre-sold single-family construction that are tracked in the NAHB AD&C survey. The above changes caused the average effective interest rates (rate of return to the lender over the assumed life of the loan, taking both the contract interest rate and initial points into account) to move in different directions. There was a relatively small decline (from 10.85% to 10.58%) on loans for land acquisition, and a more substantial decline (from 13.74% to 12.96%) on loans for speculative single-family construction. On the other hand, the average effective rate increased from 10.76% to 11.25% on loans for land development, and from 14.57% to 15.65% on loans for pre-sold single-family construction. More detail on credit conditions for builders and developers is available on NAHB’s AD&C Financing Survey web page. ‹ Declines for Custom Home BuildingTags: ad&c lending, ad&c loans, ADC, construciton loans, construction lending, credit conditions, economics, home building, housing, interest rates, lending

Credit for Builders Remains Tight, But Tightening is Less Widespread2024-02-20T14:19:38-06:00

Declines for Custom Home Building

2024-02-20T08:18:40-06:00

By Robert Dietz on February 20, 2024 • NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey indicates a slowing market for custom home building after a recent gain in market share. There were 44,000 total custom building starts during the fourth quarter of 2023. This marks a more than 2% decline compared to the fourth quarter of 2022, consistent with weakness experienced throughout the home building sector. Over the last four quarters, custom housing starts totaled 178,000 homes, a nearly 13% decline compared to the prior four quarter total (204,000). After share declines due to a rise in spec building in the wake of the pandemic, the market share for custom homes increased until recently. As measured on a one-year moving average, the market share of custom home building, in terms of total single-family starts, has fallen back to just under 19%. This is down from a prior cycle peak of 31.5% set during the second quarter of 2009. Note that this definition of custom home building does not include homes intended for sale, so the analysis in this post uses a narrow definition of the sector. It represents home construction undertaken on a contract basis for which the builder does not hold tax basis in the structure during construction. ‹ Strong Quarter for Single-Family Built-for-Rent ConstructionTags: custom, custom building, economics, home building, housing, single-family

Declines for Custom Home Building2024-02-20T08:18:40-06:00

Strong Quarter for Single-Family Built-for-Rent Construction

2024-02-19T08:17:04-06:00

Single-family built-for-rent construction accelerated at the end of 2023, as builders sought to add additional rental housing in a market facing elevated mortgage interest rates. According to NAHB’s analysis of data from the Census Bureau’s Quarterly Starts and Completions by Purpose and Design, there were approximately 22,000 single-family built-for-rent (SFBFR) starts during the fourth quarter of 2023. This is more than 29% higher than the fourth quarter of 2022. Over the last four quarters, 75,000 such homes began construction, which is almost a 9% increase compared to the 69,000 estimated SFBFR starts in the four quarter prior to that period. The SFBFR market is a source of inventory amid challenges over housing affordability and downpayment requirements in the for-sale market, particularly during a period when a growing number of people want more space and a single-family structure. Single-family built-for-rent construction differs in terms of structural characteristics compared to other newly-built single-family homes, particularly with respect to home size. However, investor demand for single-family homes, both existing and new, has cooled with higher interest rates. Nonetheless, builders continue to build smaller projects of built-for-rent homes for their own operation. Given the relatively small size of this market segment, the quarter-to-quarter movements typically are not statistically significant. The current four-quarter moving average of market share (7.9%) is nonetheless higher than the historical average of 2.7% (1992-2012). Importantly, as measured for this analysis, the estimates noted above only include homes built and held by the builder for rental purposes. The estimates exclude homes that are sold to another party for rental purposes, which NAHB estimates may represent another five percent of single-family starts based on industry surveys. The Census data notes an elevated share of single-family homes built as condos (non-fee simple), with this share averaging more than 5% over recent quarters. Some, but certainly not all, of these homes will be used for rental purposes. Additionally, it is theoretically possible some single-family built-for-rent units are being counted in multifamily starts, as a form of “horizontal multifamily,” given these units are often built on a single plat of land. However, spot checks by NAHB with permitting offices indicate no evidence of this data issue occurring. Nonetheless, demand by investors for single-family rental units, new and existing, has cooled in recent quarters as financial conditions have tightened. This will act to lower the share of homes sold to investors. With the onset of the Great Recession and declines for the homeownership rate, the share of built-for-rent homes increased in the years after the recession. While the market share of SFBFR homes is small, it has clearly expanded. Given affordability challenges in the for-sale market, the SFBFR market will likely retain an elevated market share even as the sector cools in the quarters ahead. ‹ Residential Building Material Price Increase to Start 2024Tags: economics, home building, housing, SFBFR, single-family

Strong Quarter for Single-Family Built-for-Rent Construction2024-02-19T08:17:04-06:00

Best Quarter for Townhouse Construction Since 2006

2024-02-16T11:15:51-06:00

By Robert Dietz on February 16, 2024 • Despite weakness for single-family construction in 2023, townhouse construction recorded the best quarter for starts in more than 17 years. According to NAHB analysis of the most recent Census data of Starts and Completions by Purpose and Design, during the fourth quarter of 2023, single-family attached starts totaled 47,000, which is 27% higher than the fourth quarter of 2022. This represents an acceleration over the last four quarters, during which townhouse construction starts totaled a strong 158,000 homes, which is almost 7% higher than the prior four-quarter period (148,000).  Townhouses made up almost 20% of total housing starts in the final quarter of 2023. Using a one-year moving average, the market share of newly-built townhouses stood at 16.7% of all single-family starts for the fourth quarter. With the recent gains, the four-quarter moving average market share is the highest on record, for data going back to 1985. Prior to the current cycle, the peak market share of the last two decades for townhouse construction was set during the first quarter of 2008, when the percentage reached 14.6%, on a one-year moving average basis. This high point was set after a fairly consistent increase in the share beginning in the early 1990s. The long-run prospects for townhouse construction are positive given growing numbers of homebuyers looking for medium-density residential neighborhoods, such as urban villages that offer walkable environments and other amenities.  Where it can be zoned, it can be built. ‹ Housing Starts Decline in January on Multifamily WeaknessTags: economics, home building, housing, townhome, townhouse

Best Quarter for Townhouse Construction Since 20062024-02-16T11:15:51-06:00

Fed Decision: Shifting Expectations toward Future Rate Cuts

2024-01-31T15:15:32-06:00

The Federal Reserve’s monetary policy committee held the federal funds rate constant at a top target of 5.5% at the conclusion of its January meeting. The Fed will continue to reduce its balance sheet holdings of Treasuries and mortgage-backed securities as part of quantitative tightening and balance sheet normalization. Marking a fourth consecutive meeting holding the federal funds rate constant, the Fed is now setting the ground for rate cuts later in 2024. With inflation data moderating (although still elevated) and limited slowing of labor market conditions, markets and some analysts are expecting a federal funds rate cut as soon as March. In contrast, NAHB’s forecast includes rate cuts beginning no earlier than June due to ongoing strong economic conditions. Today’s decision does not alter this outlook. The January Fed statement suggests the central bank is now in a holding pattern, with crosswinds between six months of declines for inflation rates but still present solid economic conditions. Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. Ongoing, current elevated rates will continue to place downward pressure on inflation as the economy progresses to the Fed’s target of 2% over the course of 2024 and 2025. However, as inflation comes down, nominal interest rates can be reduced in order to maintain constant yet still restrictive monetary policy. With an eye toward future Federal Reserve policy action, the Fed appears to be set for rate cuts later in 2024, but the commentary below suggest that the first cut will not come in March due to solid employment conditions and a low unemployment rate.   The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.   As we have noted with prior Fed announcements, the central bank missed an opportunity in its statement to cite the outsized role shelter inflation has played in recent CPI reports. Chair Powell did note that activity in the housing market was “subdued” during his opening statement at today’s press conference. He also indicated that he expects slower rent growth will, eventually, help the overall inflation picture. However, the high cost of development and home construction is slowing the fight against inflation by keeping residential supply constrained. State and local governments could assist the fight against inflation by addressing the root causes of these rising costs. Looking forward, the Fed’s prior December economic projections suggest three rate cuts in 2024. While the federal funds rate will move lower later this year, the Fed will continue reducing its balance sheet, thereby maintaining an elevated spread between the 10-year Treasury rate and rates for 30-year fixed rate mortgages. The 10-year Treasury rate, which partially determines mortgage rates, dipped below 4% after today’s Fed announcement. Mortgage rates will continue to register in the high 6% range, but below the 8% level housing markets experienced last October. Mortgage rates should move lower as 2024 progresses. ‹ Homeownership Rate Dips to 65.7% Amid Housing Affordability WoesTags: economics, FOMC, home building, housing

Fed Decision: Shifting Expectations toward Future Rate Cuts2024-01-31T15:15:32-06:00

Little Change for Number of Open Construction Jobs

2024-01-30T10:27:37-06:00

Due to tightened monetary policy, the count of total job openings for the entire economy has trended lower in recent months. This is consistent with a cooling economy that is a positive sign for future inflation readings. However, the December data showed an uptick due to stronger than expected GDP growth for the fourth quarter of 2023. In December, the number of open jobs for the economy increased to 9.0 million. This is notably lower than the 11.2 million reported a year ago. NAHB estimates indicate that this number must fall back below 8 million for the Federal Reserve to feel more comfortable about labor market conditions and their potential impacts on inflation. While the Fed intends for higher interest rates to have an impact on the demand-side of the economy, the ultimate solution for the labor shortage will not be found by slowing worker demand, but by recruiting, training and retaining skilled workers. This is where the risk of a monetary policy mistake had some risk of arising. Good news for the labor market does not automatically imply bad news for inflation. The number of open construction sector jobs was relatively unchanged in the most recent data, declining from 470,000 in November to 449,000 in December. The count was 488,000 a year ago, during an outlier month of strong data. The construction job openings rate decreased slightly to 5.3% in December. The recent, increasing trend indicates an ongoing skilled labor shortage for the construction sector. The housing market remains underbuilt and requires additional labor, lots, and lumber and building materials to add inventory. Hiring in the construction sector increased to a 4.6% rate in December after 4.5% in November. The post-virus peak rate of hiring occurred in May 2020 (10.4%) as a post-covid rebound took hold in home building and remodeling. Construction sector layoffs were steady at a 2.1% rate in December after 2.1% in November. In April 2020, the layoff rate was 10.8%. Since that time, the sector layoff rate has been below 3%, with the exception of February 2021 due to weather effects and March 2023 due to some market churn. Looking forward, attracting skilled labor will remain a key objective for construction firms in the coming years. While a slowing housing market will take some pressure off tight labor markets, the long-term labor challenge will persist beyond the ongoing macro slowdown. ‹ All-Cash Share of New Home Sales Remains Elevated in 2023Tags: economics, home building, housing, JOLTS

Little Change for Number of Open Construction Jobs2024-01-30T10:27:37-06:00

Housing Share of GDP Inched up In the Fourth Quarter of 2023

2024-01-25T12:15:13-06:00

Housing’s share of the economy rose to 16.0% at the end of the fourth quarter of 2023. Overall GDP increased at a 3.3% annual rate, following a 4.9% increase in the third quarter of 2023, and a 2.1% increase in the second quarter of 2023. The annual GDP growth in 2023 was reported at 2.5%. Housing’s share of GDP on an annual basis in 2023 was 15.9% — the lowest level since 2019 (15.7%). This marks a decrease from the 2022 housing GPD share of 16.4%. In the fourth quarter, the more cyclical home building and remodeling component – residential fixed investment (RFI) – remained level at 3.9% of GDP. RFI added 4 basis points to the headline GDP growth rate in the fourth quarter of 2023, marking two consecutive quarters of positive contributions. For the year, RFI subtracted 49 basis points from GDP growth. Housing services added 5 basis points to GDP growth in the fourth quarter. Moreover, housing services added 5 basis points to annual GDP growth. Housing-related activities contribute to GDP in two basic ways: The first is through residential fixed investment (RFI). RFI is effectively the measure of home building, multifamily development, and remodeling contributions to GDP. It includes construction of new single-family and multifamily structures, residential remodeling, production of manufactured homes and brokers’ fees. For the fourth quarter, RFI was 3.9% of the economy, recording a $1.1 trillion seasonally adjusted annual pace. RFI constituted 3.9% of GDP at $1.1 trillion for the year as well. The second impact of housing on GDP is the measure of housing services, which includes gross rents (including utilities) paid by renters, and owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units), and utility payments. The inclusion of owners’ imputed rent is necessary from a national income accounting approach, because without this measure, increases in homeownership would result in declines in GDP. For the fourth quarter, housing services represented 12.0% of the economy or $3.4 trillion on a seasonally adjusted annual basis. For 2023, housing services accounted for 11.9% of GDP at $3.3 trillion over the year. Taken together, housing’s share of GDP was 16.0% for the fourth quarter. Historically, RFI has averaged roughly 5% of GDP while housing services have averaged between 12% and 13%, for a combined 17% to 18% of GDP. These shares tend to vary over the business cycle. However, the housing share of GDP lagged during the post-Great Recession period due to underbuilding, particularly for the single-family sector. ‹ U.S. Economy Ends 2023 With Surprisingly Strong GrowthTags: homebuilding, housing, housing share of GDP, housing share of the economy

Housing Share of GDP Inched up In the Fourth Quarter of 20232024-01-25T12:15:13-06:00

Pandemic Silver Lining: Young Adults Moving Out of Parental Homes

2024-01-19T08:15:15-06:00

By Natalia Siniavskaia on January 19, 2024 • Despite record high inflation rates, rising interest rates, and worsening housing affordability, young adults continued the post-pandemic trend of moving out of parental homes in 2022. The share of young adults ages 25-34 living with parents or parents-in-law declined and now stands at 19.1%, according to NAHB’s analysis of the 2022 American Community Survey (ACS) Public Use Microdata Sample (PUMS). This percentage is a decade low and a welcome continuation of the post-pandemic trend towards rising independent living by adults ages 25-34. Traditionally, young adults ages 25 to 34 make up around half of all first-time homebuyers. Consequently, the number and share of young adults in this age group that choose to stay with their parents or parents-in-law has profound implications for household formation, housing demand, and the housing market. The share of adults ages 25 to 34 living with parents reached a peak of 22% in 2017-2018. Even though an almost three percentage point drop in the share since then is a welcome development that the housing market has been waiting for, the share remains elevated by historical standards, with almost one in five young adults in parental homes. Two decades ago, less than 12% of young adults ages 25 to 34, or 4.6 million, lived with parents. The current share of 19.1% translates into 8.5 million of young adults living in homes of their parents or parents-in-law. Stacking our estimates of the share of young adults living with parents against NAHB/Wells Fargo’s HOI data reveals that until the pandemic, the rising share of young adults living with parents had been associated with worsening affordability. Conversely, improving housing affordability, had been linked with a declining share of 25–34-year-old adults continuing to live in parental homes.  The strong negative correlation disappeared in the post-pandemic world, with young adults continuing to move out of parental homes despite worsening housing affordability and rising cost of independent living. The “excess” savings accumulated early in the lockdown stages of the pandemic, when spending opportunities were limited, undoubtedly helped finance the move-out trend. Will the trend continue once young adults drain their “excess” savings? The NAHB forecast highlights strong labor market conditions and expectations for receding mortgage rates that should improve housing affordability in the near future. Combined with the desire for more spacious, independent living heightened by the COVID-19 pandemic, these factors should help sustain the trend towards rising independent living of young adults even after their excess savings are depleted.  ‹ Single-Family Starts Down in December but Post Solid ShowingTags: first-time buyers, headship rates, housing, young adults living with parents

Pandemic Silver Lining: Young Adults Moving Out of Parental Homes2024-01-19T08:15:15-06:00

Construction Job Openings Rise as Total Economy Count Falls

2024-01-03T10:22:06-06:00

Due to tightened monetary policy, the count of total job openings for the economy continues to move slower. This is consistent with a cooling economy that is a positive sign for future inflation readings. In November, the number of open jobs for the economy declined to 8.8 million. This is notably lower than the 10.8 million reported a year ago. NAHB estimates indicate that this number must fall back below 8 million for the Federal Reserve to feel more comfortable about labor market conditions and their potential impacts on inflation. While the Fed intends for higher interest rates to have an impact on the demand-side of the economy, the ultimate solution for the labor shortage will not be found by slowing worker demand, but by recruiting, training and retaining skilled workers. This is where the risk of a monetary policy mistake can arise. Good news for the labor market does not automatically imply bad news for inflation. The construction labor market moved in the opposite direction of the overall economy, with the number of open construction jobs rising. The count of open construction jobs increased to 459,000 in November after a revised reading of 416,000 in October. The count was 348,000 a year ago, during a period of housing market cooling. The recent rise indicates an ongoing skilled labor shortage for the construction sector. These estimates come after a data series high of 488,000 in December 2022. The construction job openings rate increased to 5.4% November. The recent gains for construction job openings reflect the ongoing skilled labor shortage. The housing market remains underbuilt and requires additional labor, lots, and lumber and building materials to add inventory. Hiring in the construction sector decreased to a 4.5% rate in November after 4.7% in October. The post-virus peak rate of hiring occurred in May 2020 (10.4%) as a post-covid rebound took hold in home building and remodeling. Construction sector layoffs were steady at a 2.1% rate in November after 2% in October. In April 2020, the layoff rate was 10.8%. Since that time, the sector layoff rate has been below 3%, with the exception of February 2021 due to weather effects and March 2023 due to some market churn. Looking forward, attracting skilled labor will remain a key objective for construction firms in the coming years. While a slowing housing market will take some pressure off tight labor markets, the long-term labor challenge will persist beyond the ongoing macro slowdown. ‹ November Gains for Private Residential Construction SpendingTags: economics, home building, housing, JOLTS, labor market

Construction Job Openings Rise as Total Economy Count Falls2024-01-03T10:22:06-06:00

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