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   ARTICLE   |   From Scotsman Guide Residential Edition   |   December 2018

Read the Construction Tea Leaves

Housing-construction data can offer a glimpse of where the mortgage business is headed

Getting a grasp on how much construction will occur in the near future serves two purposes for mortgage originators. First, it offers an estimate of how many new homes will be built and, as such, measures opportunity to provide financing for those homes. And, second, a broad sense of total construction provides a metric of perceived economic growth.r_2018-12_lepre_spot

People in business need to plan ahead. Retail stores need to hire and order stock for Christmas. Ballparks need more hot dogs when attendance spikes. Similarly, mortgage originators need to have an idea of how much business will be coming so that they can hire if necessary.

Mortgages are made for one of three things: refinancing, existing-home purchases or new-home purchases. With the refinance market hurting because of rising interest rates, and with existing-home sales in a slump as the year comes to a close, it is easy for mortgage originators to become depressed, but data on the building of new homes provides some cause for optimism.

Lagging construction

Construction in the broadest sense can be divided into five categories: single-family homes; two- to four-unit dwellings; multifamily (apartment complexes) with five or more units; mixed-use properties, which combine living and commercial space; and pure commercial — i.e., office, retail or industrial properties.

Mixed-use properties generally have commercial on the ground floor or the lower levels with apartments or condos above. This is most often seen in cities. Multifamily can be subdivided into rental apartments and condominium complexes — which have units that are individually owned rather than leased like apartment units. Most mortgage originators are interested in single-family, two- to four-unit and condo properties.

Three pieces of data that are important to mortgage originators are new-home sales, housing starts and building permits. Because all housing is local, it is necessary to look at these data sets region by region. Most mortgage originators do business within a limited geographic area and, consequently, what is most important to them is how many single-family and condo units are being built in that area. 

The number to pay closest attention to is housing starts. Housing starts are measured in units. A single-family home is one start. A duplex is two starts. A 100-unit apartment building is 100 starts. Starts as used here are private starts only. Public housing is not counted. Manufactured housing is not counted.

A significant problem lately has been the lack of skilled construction workers. … Nine out of every 10 contractors report a skilled labor shortage.

It’s typically thought that the U.S. needs about 1.5 million housing starts per year to keep pace with population growth and scrappage of units either destroyed by disaster or torn down after becoming obsolete. The last time that the U.S. had more than 1.5 million housing starts was in late 2006.

To understand how frustrating it is to forecast future housing starts, consider a report published by the Congressional Budget Office (CBO) in 2008. That paper was trying to estimate when the nation would get back to 1.5 million annual starts.

The optimistic scenario said the end of 2009. The pessimistic estimate was that the country would not get there until the second half of 2012. A decade after the CBO report was published, housing starts are still less than 1.3 million. The lesson to be learned is that no one can accurately forecast housing starts two years into the future.

Key indicators

The best indicator for what housing starts will be in the near term is to look at building permits at the present. While not all permits turn into starts, those starts need permits. A housing start is defined as excavation (or groundbreaking) for the footings or foundation of a residential structure.

In the case of a multistory building, all units are counted as started when the structure is started. The average length of time from permit to start for a single-family home is one month for a contractor-built structure. For buildings with two to four units, the average length of time from permit to start is two months.

Housing-start and building-permit data are published jointly each month by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. The report covers all residential units, from single-family homes to multifamily buildings. 

While that gives the big picture about homebuilding in the nation, most mortgage originators are more interested in what is happening locally. Data about building permits by state and metro area are collected by the U.S. Census Bureau and reported through the National Association of Home Builders (NAHB) in spreadsheets posted to the NAHB webpage. The data, which also can be found on the Census Bureau website, is broken down in detail by community.

The census data shows that as of this past September, on a seasonally adjusted annualized basis, there were an estimated 1.24 million building permits authorized. Of that total, single-family units accounted for 851,000 authorized permits and the rest involved properties of two to four units or larger. Authorized single-family housing permits as of this past September were up 2.4 percent on an annualized basis, compared with the same month in 2017.

Housing starts on an annualized basis as of this past September registered at 1.2 million, according to census data. NAHB earlier this year projected a 2.7 percent increase in total housing starts for 2018, compared to the prior year. In general, single-family home starts are expected to be up this year and multifamily starts down slightly.

Commercial construction provides limited opportunities for mortgage originators, but it is a leading indicator of economy health. A healthy economy generates jobs creating opportunity for homeownership. The value of commercial-construction spending as of this past August was at a seasonally adjusted annualized rate of $1.3 trillion, according to census data.

Missing workers

A significant problem lately has been the lack of skilled construction workers. The U.S. Bureau of Labor Statistics reported that as of August 2018 there were 298,000 construction jobs openings.

The U.S. Chamber of Commerce reported in second quarter 2018 that nine out of every 10 contractors report a skilled-labor shortage. This may be a generational problem. Baby boomers are retiring and younger people may be disinclined to seek such jobs. Vocational training has all but disappeared from high schools as young folks are taught that college is the key to success.

Federal government policy regarding immigration also is a factor in the lack of construction workers. NAHB estimates that one in four construction workers are immigrants. According to NAHB, immigrants comprise close to 42 percent of the construction workforce in California and more than 41 percent in Texas. In New York and Nevada, 37 percent of the construction labor force is foreign-born. In Florida, 35 percent of construction-industry workers come from abroad.

In 2016, 52.8 percent of immigrant construction workers were from Mexico. If the U.S. allowed and encouraged skilled construction workers to obtain H-1B visas in the same manner as it encourages and allows H-1B visas for tech jobs, the lack of skilled-construction workers might dissipate.

Tariffs also have increased construction costs. Higher metal tariffs affect the cost of high-rise buildings more than in single-family construction, but single-family residential construction also has been impacted by tariffs on lumber, plywood and hardwood.

Land-use regulations are another reason why nearly a dozen years after the last big financial crisis, housing starts are still not back to a market-sustaining level of 1.5 million. Those regulations, in some cases, are preventing housing from being built where the jobs are being added.

The building industry may need to start additional apprenticeship programs to train people in the needed skills. Government policies, such as tariffs and immigration restrictions on a federal level and land-use regulations and zoning regulation on local levels, may need to be rethought.


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