Construction to Continue Healthy Growth in 2018

At nine-years’ old, the current economic expansion in America has lasted longer than most other economic expansions—and probably longer than most economists have expected. For many business leaders, knowing that the economy is due to for a pull-back may be reason to hedge against expanding business and taking on new risks. In some end-markets this may be prudent, but of all markets, data from housing indicates that there is very little chance of a slowdown even in the event of a short-lived recession.

According to U.S. demographic and housing data through January 2018, the industry continues to make solid gains for the seventh straight year. The fundamentals supporting this growth give Gardner Intelligence confidence that this market remains substantially underserved; that is, even in the event of an economic slowdown at some point in the next few years, odds are that the housing market will be a source of strength, rather than a weakness for the economy.

Between the great recession and 2016, demographic data indicated a decline in homeownership rates among those between the ages of 25 and 39. At the same time, the number of households created in this same age range has increased every year since mid-2010 and is now 20% higher than at the peak of the 2007 housing boom. This combination of lower ownership rates and high household formation has created a foundation for additional housing that will beespecially sharp in light of rising wages and low unemployment, which may move more families into the category of homeowner.

Housing starts have progressively improved every year since 2009; however, even the latest annualized housing constructionrate of 900,000 h omes is more than 20% below the average home starts rate between 1985 and 2001 of greater than 1.1 million homes. Low housing-start levels in recent years also come at a time when housing affordability is better now than at any time prior to 2008.

Housing affordability, which hit a multi-decade high in 2012, has fallen since, yet is still significantly better than at any time between 1985 and 2007. Looking forward, should the Federal Reserve raise interest rates, as is expected to happen several times in 2018, this will increase mortgage interest rates, increasing the cost of home ownership, hurting the housing affordability index.

Despite the increased chances of a slowing economy at some point in the future, strong demographic trends and good home affordability will produce substantial tail-winds in the housing markets. Manufacturers and fabricators looking to diversify and grow should keep watch for opportunities for their companies to grow in this market.

ABOUT THE AUTHOR: Michael Guckes is the chief economist for Gardner Business Intelligence, a division of Gardner Business Media (Cincinnati, OH). 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