Housing Poised for Growth

The dynamics of the housing market continue to be dominated by constrained supply. Much of the constraint is a result of a severe and prolonged shortage of home-building labor. As national unemployment rates have fallen to rarely seen lows, available labor has become increasing tight and as a result has choked the rate of new home construction. Meanwhile, new household formation is growing, creating increased demand for new housing. With demand far outstripping supply, the industry is poised for growth.

An examination of U.S. housing starts over the last 20 years provides stark evidence of the effect that a lack of labor is having on the market. U.S. housing starts, reported at a seasonally adjusted annual rate, were 1.173 million at the end of June 2018 according to the Census Bureau. By comparison, at the peak of the housing market boom in early 2006, homes were being constructed at nearly twice that rate. Long-run construction rates show a substantially similar picture. In the 20-year period ending with 2001, the average home-building rate was over 20% higher than it is today. All of this points to a severely underserved market in which a low supply of homes for sale has driven prices higher, creating a very lucrative situation for builders and their suppliers.

That home values are appreciating faster than incomes is an unsustainable situation. Further complicating the longer-run view of the market are rising interest rates that will make monthly mortgage payments more expensive and thus tamper price appreciation. However, the combined effects of those factors—which put downward pressure on home prices—may need a long horizon before overcoming the significant imbalance of supply and demand. The result is that Wall Street’s short-term outlook for the industry is very optimistic.

Wall Street’s latest projections for the U.S. home construction market, as measured by publicly-traded home builders and their downstream suppliers, is for revenue and earnings growth in 2019 and 2020 easily exceeding that of the overall economy. Annualized revenue growth during the second half of 2018 is expected to approach 14%, while earnings growth is expected to exceed 30%. Both revenues and earnings growth are expected to peak in early 2019, before the industry experiences slowing growth. Projections to mid-2020 are for earnings growth of 8% and revenue growth of 6%, indicating that the housing market would still be growing approximately twice as fast as the overall economy.

ABOUT THE AUTHOR: Michael Guckes is the chief economist for Gardner Business Intelligence, a division of Gardner Business Media (Cincinnati, OH US). He has performed economic analysis, modeling and forecasting work for nearly 20 years among a wide range of industries. Michael received his BA in political science and economics from Kenyon College and his MBA from The Ohio State University. mguckes@gardnerweb.com