Residential Construction Overview With ITR Economist Derek Stanley

ITR Economist and Speaker Derek Stanley provides our outlook for residential construction in 2024. He details the challenges our clients are facing, highlights our expectations for next year and beyond, and offers actionable advice that you can apply to your business strategy!

Q: What are ITR Economics’ expectations for US residential construction for the remainder of 2024?

Derek: ITR Economics’ outlook for residential construction varies by market segment. Right now, it is expanding following the period of significant contraction from about mid-2022 to mid-2023.

Favorable economics for middle-and-upper-income consumers is partially driving the recovery. In addition, first-time homebuyers are finding their way into the market. Both of these avenues are helping. Companies and clients that work with us and are tied to the residential market are starting to see that upside pressure now. It is key for these companies to understand where they fall in the business cycle timeline in relation to residential construction. For this, we look at the Trends 10, an economic metric that we highlight in Trends Report™.

As we see additional rise in residential construction, we will see corresponding gains in the overall macroeconomy in time. There will be upside trends in the manufacturing space on a national level and in wholesale trade, new orders, retail trade, and other segments that tend to follow the housing lead.

Q: What are some of the most common questions clients ask you about US residential construction? What advice are you giving them based on our outlook?

Derek: Clients who have a national reach are curious about which regions will have the best opportunities. States such as Texas and Florida have shown fairly prominent growth since the Great Recession. Other states, like Tennessee and North Carolina, are also of interest. Utah, Nevada, and South Carolina hold promise.

I also get questions about capacity planning. Are we at the point where companies should be letting people go? Should hiring freezes be done? Should labor be added? If you are directly tied to construction, keep hiring. You do not want to be in a position later where you are hiring out of desperation.

Another thing on our clients’ minds is where interest rates are going. ITR Chief Economist Brian Beaulieu has been doing Fed Watch episodes every week, and, at the moment, we are in somewhat of a wait-and-see pattern. At this time, we do not know if the Federal Reserve will see sufficient evidence of core inflation coming down to actually put through meaningful interest rate decline.

Keep watching our Fed Watch series, take note of the Fed's tone in their messaging, and follow the data. We expect lower interest rates in the future, and we want you to strike before the next rising trend for interest rates sets in.

Q: What are some of the biggest challenges clients can expect to see in the construction industry this year?

Derek: The challenge here is simply knowing where you fall in the business cycle. That is the difference between getting ahead of the curve and being caught off guard.

Labor constraints will remain a persistent challenge. Continue to invest in people, as they are your greatest long-term asset. If your customers are contending with labor issues, see if you can offer innovative solutions to make doing business with you more beneficial. That could be through exceptional customer care, reduced lead times, or logistical assistance to lessen their burden.

Lastly, elevated costs will continue to be a challenge. We expect some minor deflation in US Producer Prices, but pricing levels will remain elevated largely due to wages. Investing in technology that will help obviate the impact on your bottom line is crucial. Investing now will pay dividends later when these technologies allow you to scale up efficiently while your competitors are still contending with labor shortages and eroding margins.

Q: When talking with clients, what are some key pieces of advice you always give for the US residential construction space?

Derek: Follow the people because the consumer drives the economy. Net migrations are a telltale sign as to which regions are likely to provide the most long-term growth opportunities for your business. Robust permitting trends in these key states predate the pandemic, meaning this is not a short-term fluke but rather a long-term pattern of people and businesses relocating to certain parts of the country for a variety of reasons. If you are looking to take your business to the next level, consider geographics.

This is not to say that areas such as the Midwest and Northeast should be abandoned. There are still opportunities in these regions, and they should be part of your strategy if you operate on a national level. What we do mean is that discussions around expansion, allocation of financial and human resources, capital planning, and sales and marketing efforts should take population and permitting trends into account. The South and, to a lesser extent, the West are showing the most promise.

So, know the permitting trends in your key states. How has the long-term 12MMT been moving, and what is the timing relationship to your business on a rate-of-change basis? If you need help answering these questions, reach out to us. That is what we are here for.

My last bit of advice is to be mindful of shifting housing preferences. Yes, single-family homes are desirable, but they are expensive. We may ultimately see a shift in favor of smaller, more affordable homes or even multi-family options. This may be especially true in metro areas where population is a factor, land is scarcer, and the cost is living is elevated compared to the surrounding regions.

Remember that single-family still accounts for the majority of the residential construction market, but, depending on the region, multi-family opportunities may be more or less pronounced.

Q: How will 2025 and 2026 compare to what we will see in the residential construction industry in 2024?

Derek: Home inventories are low, the consumer is in a stable position, and the Federal Reserve has forgone additional rate hikes since the second half of 2023. We expect expansion in US Single-Unit Housing Starts into late this year, followed by a brief plateau into early 2025. At that point, we should see more prominent expansion resume.

The main takeaway is that we do not expect a period of significant contraction like we saw in 2008 or in 2022 and 2023 over the next three years. Our outlook calls for the trajectory of annual Housing Starts to somewhat resemble the trendline we saw between the end of the Great Recession and the beginning of the pandemic – general rise. The opportunity will be there; perhaps it will not be as pronounced as that late-2020-to-early-2022 period, but it will be there.

As for the multi-family market, we expect expansion to resume in the near term and extend through 2026. The multi-family market has historically lagged the single-family market for several reasons, including the multipurpose function of multi-family buildings – think apartments, retail space, and so on. While this sector is only about 30% of the total residential construction market by comparison, that trend could shift in the future as consumer preferences adapt to affordability challenges and limited availability. We are beginning to see this unfold in certain regions.