• PT Youtube
  • PT Facebook
  • PT Linkedin
  • PT Twitter
11/24/2014 | 2 MINUTE READ

Is Residential Construction Softening or Bottoming Out?

Facebook Share Icon LinkedIn Share Icon Twitter Share Icon Share by EMail icon Print Icon

Signs are mixed. But we expect housing permits to grow faster next year and take plastics parts production along for the ride.

Depending on the data, the residential construction market is either continuing to soften or on the verge of bottoming out. The month-over-month rate of change in real residential construction spending had been growing slower and slower throughout 2014 until the last two months. In both August and September, the month-over-month rate of change contracted at 1.5%. That was the first time that real residential construction spending had contracted in consecutive months since December 2011 and January 2012. As a result, the annual rate of change has decelerated to its slowest rate of growth since September 2012.

While the monthly data in construction spending has continued to deteriorate, the opposite is the case with housing permits. The month-over-month rate of change in housing permits has grown for four straight months. In three of those four months, the rate of growth was above 10%. But the annual rate of growth has been decelerating since April 2013. After the September data was released, the annual rate of change was 7.9%. Given that the monthly rate of change has been stronger that the annual rate of change since June, it appears that the housing permits are about to bottom and start growing faster again.

Housing permits typically lead plastic-part production by 10 to 12 months. Based on the current trends in housing permits, look for a slight deceleration in the rate of growth in plastics parts production in early 2015. Then, as housing permits grow faster, plastics parts production should also grow too.

The real 10-year Treasury rate is also pointing to accelerating growth in housing permits. The real 10-year Treasury rate was 0.91% in September. This was up slightly from the month before, but the real rate has been less than 1.0% for three straight months. Since July 2013, the year-over-year change in the real 10-year Treasury rate has been falling. It has been in negative territory, meaning the rate is lower than it was one year ago, for three straight months.

The trend in the change in the interest rate is moving in a direction that would indicate significant growth in permits. While the Fed has ended quantitative easing, and many expect interest rates to rise, past data shows that the real 10-year Treasury rate actually could go even lower now. Given the government’s need for low interest rates to manage its debt, interest rates will unlikely be allowed to rise significantly anytime soon. This should continue to provide support to the construction market.