Market Facing Constraints on Growth

While the homebuilding and residential remodeling markets continue to grow, a variety of factors is putting a lid on more-robust growth as 2019 is poised to enter its final quarter. Among the key statistics and forecasts released in recent weeks by government agencies, research firms and industry-related trade associations were the following:


Builders report “solid demand” for single-family homes, although they continue to grapple with labor shortages, a dearth of buildable lots and rising construction costs “that are making it increasingly challenging to build homes at affordable price points relative to buyer incomes,” according to Greg Ugalde, chairman of the National Association of Home Builders. While single-family housing starts have posted recent gains, total housing starts – currently pegged at a seasonally adjusted annual rate of 1.25 million units – are being impacted by declines in multi-family production, the Washington, DC-based NAHB said last month. “Even as builders try to rein in costs, home prices continue to outpace incomes,” said NAHB Chief Economist Robert Dietz.


Growth in residential remodeling spending is expected to slow considerably by the second quarter of 2020, according to the latest “Leading Indicator of Remodeling Activity” (LIRA), a barometer of current and future remodeling activity released by the Joint Center for Housing Studies of Harvard University. The LIRA forecasts that annual gains in homeowner expenditures for improvements and repairs will shrink from 6.3% in the second quarter of 2019 to just 0.4% by the second quarter of 2020 (see related graph, above right). The second quarter 2020 market for residential remodeling is projected at $323 billion, according to the Cambridge, MA-based Joint Center. “Declining home sales and homebuilding activity coupled with slower gains in permitting for improvement projects will put the brakes on remodeling growth over the coming year,” said Chris Herbert, Joint Center managing director. “However, if falling mortgage interest rates continue to incentivize home sales, refinancing and ultimately remodeling, the slowdown may soften some.”


Existing-home sales are running at a pace similar to 2015 levels, even with exceptionally low mortgage rates, a record number of jobs and a record high net worth in the country, the National Association of Realtors reported last month. Lawrence Yun, chief economist for the Washington, DC-based NAR, said that the nation is in the midst of a housing shortage and a lot more inventory is needed to meet demand. “Imbalance persists for mid-to-lower priced homes with solid demand and insufficient supply, which is consequently pushing up home prices,” Yun said. Existing-home sales, running at a seasonally adjusted annual rate of 5.27 million units in June, are down 2.2% from a year ago at the same time. Yun noted that other factors could also be contributing to the low number of sales. “Either a strong pent-up demand will show in the upcoming months, or there is a lack of confidence that is keeping buyers from this major expenditure,” Yun stated. “It’s too soon to know how much of a pullback is related to the reduction in the homeowner tax incentive.”

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