Thriving construction industry in 2018 will primarily build for wealthier firms/residents?

The recovery from the housing bubble and Great Recession of the late 2000s continues in the construction industry:

For all of 2017, construction added 210,000 jobs, a 35 percent increase over 2016.

Construction spending is also soaring, rising more than expected in November to a record $1.257 trillion, according to the Commerce Department. That was up 2.4 percent annually. Spending increased across all sectors of real estate, commercial and residential, with particular strength in private construction projects. The only weakness was in government construction spending.

Construction firms are clearly looking to hire more workers. Three-quarters of them said they plan to increase payrolls in 2018, according to a new survey from the Associated General Contractors of America. Industry optimism for all types of construction, measured by the ratio of those who expected the market to expand versus those who expected it to contract, hit a record high…

Contractors are most optimistic about construction in the office market, which has seen little action since the recession. Transportation, retail, warehouse and lodging were also strong in the survey. Respondents were less encouraged by the multifamily apartment sector, which is just coming off a building boom.

Although this article does not say much about this topic, it would not surprise me if most of the gains in new structures in 2018 tend to go to (1) wealthier areas and (2) wealthier occupants (whether companies/organizations or residents). A thriving construction sector could theoretically float all boats but it sounds like the bifurcated housing market (and perhaps office and commercial as well) will continue.

It is interesting to see that the office market could see some significant construction. How much of that new office space comes at the expense of older structures that are less desirable because of less popular locations or because rehab costs would be too high?

 

Construction of apartments increases in the Chicago suburbs

The pace of apartment construction is at the highest in the Chicago region since 2004:

Rental construction reached its highest level in more than a decade last year in the Chicago suburbs, and 2018 is shaping up as another busy year. More than 4,200 units were completed in 2017, and about 3,900 more units are projected for this year, according to data from Marcus & Millichap and MPF Research…

The rental resurgence is the result of several factors, including a rising disparity between suburban and downtown rents, pent-up demand after little new construction over the past decade, and declining home ownership, industry experts say…

Unlike downtown Chicago, where much of the development is clustered together, many suburban projects are miles from another new development, meaning they face minimal competition for new renters…

“Now, with condo development just about going away, you’re seeing towns and cities giving building permits to apartment projects they wouldn’t have considered a few years ago. Also, I think apartments have lost some of their stigma because now they’re so damn nice.”

Three quick thoughts:

  1. While this may be an increase in apartment units, this is still behind the construction of single-family homes. For example, the Chicago region had 6,000+ new housing starts for single-family homes in 2016.
  2. It is interesting to note where the apartments are being built: probably in desirable communities (relatively wealthy, close to jobs and amenities) and often in downtown areas (this is cited in this same article). To flip this around, apartments are not desired everywhere or by all suburban communities.
  3. Will the trend toward apartments in the suburbs continue to increase? This might be a correction to a lack of apartment construction in the last decade or it might represent an enduring change as suburban residents desire more rental units.

Overall, apartments in the suburbs are relatively unique compared to the overwhelming preference for owner-occupied units. Thus, the numbers regarding apartment construction in the suburbs bears watching.

Don’t forget that American residents can collectively help decide what houses mean for Americans

Kate Wagner of McMansion Hell ends a commentary piece several months ago by arguing Americans need to redefine the meaning of the home:

We need a cultural re-examination of what a home should do for us. Are we building our homes to cater to the communal needs of a family or to accommodate items or signifiers that will impress others? Will a home inspire its inhabitants to spend time with one another or isolate themselves in myriad rooms? Are we building a home to live in, or are we preoccupied with the idea of selling it even before the first brick is laid? Do we want to remodel or redecorate, or do we feel we have to because we’re constantly flooded with content that makes us feel inadequate if we don’t?

It’s time we as space-inhabiters break this unsustainable, unnecessary, and wasteful cultural cycle of consumption and reclaim our homes as our proverbial rocks, the spaces that make us feel safe and content. Who gave industry-funded media like HGTV or Houzz the right to dictate the proper and best ways to inhabit our spaces, to ridicule or diagnose as wrong those of us who lack the desire or the means to constantly consume in precisely way they want us to? A home isn’t an investment vehicle where cash goes in and more cash comes out, or the “After” segment of a television show. A home is, above all, an intimate, personal place; a haven where our intricate lives as human beings unfold. Grey paint be damned.

This names several actors who are defining what Americans want in homes. This includes:

-Media like HGTV.

-The housing industry.

Both certainly have power and influence. The housing industry through the National Association of Home Builders has a powerful lobbying presence. Just see their actions in the latest debates over the mortgage interest deduction. For decades, various media outlets have pushed the image of single-family homes filled with consumer goods; they needs advertisers after all. HGTV has a limited audience but their viewers may be the same upper-middle class Americans that feel like they are not doing well and are very vocal about this.

But these are not the only actors influencing what Americans think of homes. This list should also include:

-The government.

-American residents.

Histories of how the American suburbs developed in addition to overviews of federal housing policy (see this recent example) suggest that federal government in the last century or so is set up to help people obtain homes in the suburbs.

Often missing in these analyses is the role of American residents themselves. What kinds of homes do they truly want? More Marxist analyses suggest Americans have been duped or led into wanting large homes in a capitalist system. Thus, we should help Americans find homes that truly fit their needs rather than mindlessly giving in to what the housing industry and government want them to have. (Wagner’s paragraphs above sound very similar to Sarah Susanka arguments in The Not-So-Big House.) “Re-claim our homes” could involve fighting back against the capitalist system that insists our homes are true markers of who we are (and distracts us from the real issues at hand). In contrast, historian Jon Teaford suggests these sorts of homes are what Americans do truly want because they highly value freedom and individualism. Others like Joel Kotkin have made similar arguments: Americans keep moving to the suburbs because they like them, not because they are forced into them or are not smart enough to fight the system.

Regardless of where these ideas about homes came from (and it includes a mix of institutions as well as ideologies), American residents still have the ability to reject the typical narratives about single-family homes. They do often have options available to them. What kind of home they chose is a very consequential decision. And, perhaps even better, this does not have to be an individual effort or solely about personal empowerment: Americans could collectively vote for candidates and parties that would have a different image of housing. But, oddly enough, housing rarely comes up in national politics and local politics seems full of zoning and housing disputes but few large-scale efforts to provide alternatives. If Americans want housing options to change, they do not have to just turn off HGTV; at both the federal and local level, they should vote accordingly and/or insist that political candidates talk about these issues.

Ideologies and behaviors regarding housing do not just happen: they develop over time and involve a multitude of actors. To have a new vision of housing in America will likely take decades of sustained effort within multiple structures and institutions. These are not new issues; those opposed to McMansions today are related to those opposed to the mass suburbs of the 1950s and to the social reformers of the early decades of the 1900s who promoted public housing. The efforts can be top-down – changes need to be made at the highest levels – but could be more effective if they start at the bottom – with average voters – who demand change of businesses and governments.

Can the housing industry survive by only catering to the wealthy?

In the short-term, it appears the housing industry is aiming at the wealthy. Can this work in the long run?

It’s possible to get rich if your business only caters to rich people. But it’s hard to have a massive and really successful industry in the United States today if you only cater to rich people. There are only so many people in the country with good credit and lots of cash sitting around. And this week, we got evidence that one of America’s largest industries may be running into trouble because its products appeal only to the upper crust. I’m not talking about jewelry or apparel. I’m talking about housing.

And yet the article goes on to provide little evidence that the housing industry will be in trouble if it continues on this path. The profit margins are higher. The big builders, like Toll Brothers highlighted in the story (as they almost always are when there is a story about luxury housing), and the big investors who swooped in during the housing crisis are doing fine. There are not that many smaller builders left. A loss in building volume would probably mean some job losses in real estate, construction, banking, and other related services. But, perhaps the housing industry in the future is leaner and aimed at the upper end?

As I mentioned in Friday’s post, if markets work as they are said to work, there are plenty of opportunities here for businesses to jump in. Newer technologies can lead to cheaper housing units and lower construction costs. There is a huge need for affordable housing so there shouldn’t be a shortage of demand (even if it may be difficult to find sites where neighbors aren’t opposed to it). Doesn’t someone want to grind out profits at a lower margin? The question moving down the road is whether the housing industry will react in such a way or not. There is no guarantee that it will.

NAR economist: “major housing shortage” in the US

The chief economist for the National Association of Realtors suggests there is a major housing shortage:

“A major housing shortage exists in this country,” Yun said in a statement. “It is therefore disappointing to witness in March the continued lackluster performance in new-home building, which was the second lowest activity over the past six months. Home prices have risen by 41 percent and rents have climbed 17 percent over the past five years at a time when the typical worker wage has grown by only 11 percent. To relieve housing costs, there simply needs to be more homes built.”

My first thought on this reading this: builders and developers are still skittish from the 2000s housing bubble. Instead of risking overextending themselves, compared to the past they are now focusing on more expensive homes or rental properties. Oddly though, I have seen little media coverage regarding builders and developers. They may be a secretive bunch generally but why isn’t there more scrutiny of their actions and motivations?

My second thought: if there is indeed a housing shortage, what does this say about the state of the economy? A booming construction sector is often related to a good economy. It doesn’t necessarily have to be this way in the future, particularly if there is a shift away from sprawl and homeownership of detached single-family homes, even if it was true in the post-World War II era.

Finally, who might be held responsible if there is indeed a housing shortage? It is hard to rally potential homebuyers into a cohesive group. Is there a way to prod politicians and business leaders to act and if so, could their actions even effect much change?

Housing anxiety in America will lead to what kind of action?

A new poll suggests Americans are worried about housing:

According to a survey by the NHP Foundation, 75 percent of Americans are worried they could lose their homes, while 83 percent of respondents said that they were concerned about the rising costs of housing.

Some 30 percent of the respondents described themselves as “very concerned” that they or a close friend or relative could lose their housing, meaning that nearly one-third of Americans feels that a lack of affordable housing could represent a personal crisis. Another 27 percent described themselves as “concerned”—meaning more than half of respondents consider housing instability to be a looming danger.

Per the poll, about 40 percent of respondents say that they fear they could lose their homes due to job loss. This fear is not unfounded. Neil Gabler’s May cover story for The Atlantic cites Federal Reserve Board data that showed that almost half of U.S. households (47 percent) could not muster $400 in an emergency. A report by the Urban Institute shows that more than one-third of all American families (36 percent) have savings of less than $250. One-quarter of U.S. households have no savings at all…

The NHP Foundation finds that 80 percent of its respondents (1,000 Americans polled nationwide) say that they would welcome affordable housing in their communities. But affordable housing is rarely if ever posed to residents or voters as an up-or-down, yes-or-no question: “Would you like more affordable housing?” Sure, we all would. Except when it involves changes to the places where we live; then our neighbors flip out about it.

Perhaps builders will help with a shift toward constructing smaller homes. Or, as the quote above suggests, housing isn’t the primary issue: people anxiety about jobs which then affects housing.

Thinking longer term, I wonder what it would take to advance more drastic solutions to housing issues. Some possible turning points:

The homeownership rate continues to drop. Some might say this limits the American Dream while builders could note that this limits their profits and industry (which is also connected to jobs).

-Housing prices rise to where a larger segment of the market is paying substantially more than 30% of their income for housing. Even then, how exactly would this group turn their grievances into collective action?

-Another economic downturn leads to higher employment and more housing issues. Higher foreclosure and eviction rates could cause issues.

-A political candidate makes housing a major issue. As this article notes, no one is really talking about this.

-Could there be a major building or financial scandal that leads to reform?

I’m not sure any of these would lead to anything but temporary measures. Or, perhaps housing in the United States will simply slowly change: wealthier residents will be able to afford newer housing in better locations, people with fewer resources will have fewer and fewer options, homeownership will become less desirable, and all of this will be more clear in a few decades.

Recession decimated construction workforce

Here is another sign the construction industry has not fully recovered from the economic crisis: the number of construction workers is still low.

The new-construction housing market is slowly recovering from the turmoil of the recessionary years, but builders haven’t been able to pick up where they left off. More than 2 million skilled labor jobs were lost to the economy, and many of those workers are gone forever…

Nearly 30 percent of the construction workforce disappeared during the Great Recession, reports FMI Corp., a Raleigh, N.C., provider of management consulting, research and investment banking to the construction industry. Among its ranks are plumbers, electricians, roofers, bricklayers and carpenters.

The shortage seems to be worsening. According to FMI’s 2015 “Talent Development in the Construction Industry” survey, 86 percent of respondents reported shortages of skilled labor. That’s up from the 2013 survey, in which 53 percent of respondents reported such shortages.

It may take a long time before the housing industry approaches where it was in the early to mid-2000s. In the meantime, those workers have to do something and/or go elsewhere. Even with all the political talk about helping workers, I don’t remember anyone suggesting plans for helping construction workers in the same way that politicians have discussed manufacturing workers.

Additionally, I wonder what it takes to ramp up with a lot of new workers if the housing industry starts booming again. Businesses today tend to shed workers when times are bad, add when the economy picks up, and disregard training and upstart costs. However, it is not always simple to just hire large numbers of laborers.