Peter Tateishi, CEO of Associated General Contractors of California, says the results of the November mid-term elections in the U.S. aren’t expected to have a significant effect on construction in California.
“Government funding for infrastructure construction projects has already been approved for the next five to 10 years,” said Tateishi. “We’re waiting to see what will happen to the economy and inflation, which has been trending downward of late. They will have more of an impact on construction in California than the results of the 2022 midterm elections.”
The effect of inflation on construction can be seen in recent National Association of Home Builders (NAHB) and Wells Fargo numbers.
“Traffic at showrooms has plummeted,” said Alex Carrick, ConstructConnect chief economist, in his recent mid-November housing starts report.
“Affordability is being negatively impacted by mortgage rates that have doubled to seven per cent or more as part of the Federal Reserve’s tightening push.”
Carrick said the Fed wants to slow the U.S. economy enough through interest rate hikes to bring inflation down, “which, by the way, is showing signs of relenting.”
“The ‘slowing of the economy’ part of the plan is worrisome, because it might bring on recessions of who knows what duration or magnitude,” he said.
According to the Housing Market Index that is calculated by the NAHB and Wells Fargo, developer confidence in the U.S. single-family marketplace declined for the 11th straight month in November.
“Given that the index reading can vary from a terrible 0 to a joyous 100, the latest figure of 33 was quite weak,” said Carrick. “Other than for a brief moment in the earliest stage of the pandemic (spring 2020), it was at its lowest point since June 2012.”
The multi-family segment of residential construction is also monitored by the NAHB (quarterly instead of monthly).
That part of the market has tended to be more upbeat than its single-family counterpart, although some slippage appeared in the third quarter of 2022.
“The statistics as they relate to single-family and multi-family starts in units are revealing,” said Carrick. “In October, single-family initiations in units were down 6.1 percent month-over-month and 20.8 percent year-over-year.” Multi-family starts were also down by 1.2 per cent month-over-month. But they were up 17.8 per cent year-over-year.
The monthly average of single-family starts from January to October 2022 was down 6.6 per cent compared to the average for the same period in 2021.
Starts of multi-family residential units, on the other hand, have performed much better this year.
Average monthly units of multiples in 2022 have gone up 18.1 per cent compared to the average monthly figure (seasonally adjusted and annualized/SAAR) in 2021.
Both single- and multi-family segments of the residential construction market will be carefully watching what steps the Federal Reserve takes next.
On Nov. 30 the central bank made its most recent announcement on how it intends to fight inflation.
Chairman Jerome Powell said it was time for the Fed to reduce the pace of future interest rate hikes from the three-quarters percentage point increases it has made since June 2022.
In the future it will move more slowly toward the interest rate that is needed to slow inflation to its two per cent target.
Powell said to expect a protracted economic adjustment in which borrowing costs remain high, inflation comes down slowly and the United States remains short of workers.
“I think for now we have to assume, that labor supply won’t rebound,” Powell said. “We have to do what it takes to restore balance in the labor market to get back to two per cent inflation…really just by slowing job growth rather than putting people out of work.”
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