The housing market is a big deal. Not only is housing one of the most significant leading economic indicators, but private residential construction (calculated this year to come in at a seasonally adjusted annual rate of $503.4 billion) represents over half of all private construction project value in the nation. Private residential construction spending is classified into 3 main categories: single-family construction, multifamily, and home improvements (more on that later).
If you’re in the construction business, here are a few points to keep in mind when you’re thinking about the state of the residential construction industry segment:
Factors Driving Home Renovations:
Aging in Place Remodeling
We’re all getting older, of course, but consider this statistic about the baby boomer generation (persons born between 1946-1964): Over the next 20 years, one-third of U.S. heads-of-households will be aged 65 years or older, with the number of households aged 80 and above projected to double from 7.8 million in 2015 to 16.2 million by 2035. This is a huge demographic shift that will impact the American economy on many levels. For the residential construction business, that means that boomers are contemplating renovation projects in their existing homes to help ease the transition to the “age in place” phase of their lives. Popular projects include added or task lighting, curb-less showers, grab bars, non-slip floors, wheelchair ramps, and widened doors.
Renovating is on an Upswing Nationwide
According to an August 2016 article published by John Burns Real Estate Consulting, LLC, big ticket remodeling is surging, while homes for sale as a percentage of occupied households has hit an all-time low. According to Houzz, 52% of homeowners say that they plan to start or continue a home renovation project in 2017!
There could be several factors driving this trend of homeowners staying put. For one, people who bought houses in neighborhoods that were “up and coming” a few years ago now find that their once quiet ‘hood is now hot. When they’re ready for an upgrade, finding a suitable house in the same area is beyond their price range and renovations are more economical. Another could be that, as the overall economy continues to improve, homeowners that were underwater on their mortgages during the recession are now (hopefully) building equity in homes. That equity may not be enough to finance the downpayment on a bigger house, but it might just be enough for a home equity loan or line of credit to fund a “big ticket remodeling project.” And of course, rising interest rates mean that mortgages are becoming more expensive, further incentivizing homeowners to stay put.
Another fascinating bit of information is that the home improvement business apparently weathered the last recession much better than new construction. In the Private Residential Construction Spending Index graph (below), it’s interesting to see that, as the overall residential construction segment grew from 2000-2006, single-family, multifamily, and the improvement segments all grew at almost the exact same pace, moving in almost lockstep with one another. But when the housing bubble burst throwing the country into the recession, the impact on single-family and multifamily construction spending was drastically worse than in the improvements segment, which weathered the recession much better.
Overall, home renovation accounts for $178.9 billion (36%) of the total private residential construction market, but it’s growing at the fastest pace. On a year-over-year basis, home improvement spending is growing at a rate of 11.8%, more than multifamily’s growth rate of 7.4%, and dwarfing single-family construction spending growth which is just 0.3%.
Some interesting things we learned from this chart:
A. Is home renovation “recession proof?” Take a look at the Improvements trend line above – even at the lowest depths of the recession, home improvement spending really didn’t take too bad of a hit, especially when compared to single-family and multifamily residential construction activity.
B. As residential construction rebounds, the growth in multifamily construction is far outpacing single-family building. However, single-family construction is still the largest segment in the private residential market, accounting for $258.4 billion (51%) of the total private residential construction market.
Factors Driving Building New:
The Market Has Fully Recovered From the Recession
According to a report from ABC News, the U.S. needs about 1.5 million new homes every year to meet the annual demand for new housing. After 10 years of under-building due to the housing-led recession, the market has turned, and demand for housing is increasing from most demographic groups across the board. Demographically, we’re seeing Gen-Xers needing more space as they add to their families, while baby boomers are needing less, leading them to downsize. Also helping the boomers to downsize may be the fact that their millennial children are getting better jobs in the improving economy and are finally moving out of mom and dad’s basement and purchasing places of their own. Overall, private residential construction spending is at a post-recession high, and has grown 7.5% year over year.
The Surging Multifamily Market
As shown in the chart above, multifamily construction is absolutely surging, growing at a record breaking pace especially when compared to to single-family home construction. We’re not sure what’s behind this growth, exactly. While the “aging in place” remodeling trend has recently caught the attention of industry analysts, homeowner aging has been a driver of multifamily construction projects for decades. Also of note is the trend for professionals of all ages moving out of the suburbs to live in downtown, into a mix of loft apartments carved out of historic buildings as well as newly constructed apartment buildings.
The Huge Trend of Tiny Houses
Recently dubbed a huge trend by Fox News, the so-called “tiny house movement” has grown to be something more than a simple fad. Public interest in the phenomenon, measured by search interest (see Google Trends chart, right), has grown tremendously over the last several years. So what makes a tiny house “tiny?” Consider this: the average size of a new home built in the U.S. is 2,598 square feet; tiny houses are typically in the 100-400 sq. ft range. Now, just one factor, even a so-called huge trend, is not enough to move the needle of the residential construction industry on its own. But if the tiny-house trend is not just about going small, but rather, just one part of a much bigger movement towards building homes that are more energy efficient or technologically advanced, there will likely be an impact on the overall market.
Though the growth of single-family construction spending is lagging behind both the multifamily and home improvement segments, it still makes up a majority of the total private residential construction industry outright, accounting for $258.4 (52%) of the $503.4 billion total. In the coming years it will be interesting to see how the various demographic shifts and trends interact with the continued overall growth of the economy (hopefully) to impact the residential construction business.