Residential construction spending now represents 62% of the private construction market, compared to only 50% just six years ago.
By Manuel Gutierrez, Consulting Economist to NKBA
Total private construction rose 0.7% in March to an annual rate of $1.17 trillion. Within this market, residential construction grew to $725 billion, up 1.7% from the previous month, while the nonresidential sector fell just under 1% to $444 billion.
Since the start of 2020, even before the pandemic, residential construction has consistently been gaining while nonresidential has been pulling back.
Both sectors had represented equal shares of the private construction market as recently as six years ago, but since then have been moving in opposite directions. Residential now accounts for 62% of the total market. Figure 1 illustrates that most of that gain has occurred since the beginning of last year, when residential’s share of private construction was slightly under 55%.
Residential construction now comprises 62% of private construction compared to 50% six years ago, as gains in homebuilding move in stark contrast to losses from office and related non-residential construction.
Within the residential segment are newsingle-family housing and homeowner remodeling. Spending for each increased in March by an identical 2%.
Construction of single-family houses is the largest segment, accounting for over half of the residential market (54%). It reached $390 billion in March, continuing a 10-month pattern of steady increases. Even with these gains, however, spending to build new single-family homes is lower than what it was in 2006, at the peak of the last housing boom, when it reached $470 billion.
Note in the top-right chart of Figure 2 that the increase in each of the last three months is the lowest since July of last year. Given the strong demand for housing, it is very likely that the shortage of skilled laborers may be impeding a more robust market.
The other new housing segment, construction of Multifamilyunits, actually fell in March by 0.3%, down to an annual rate of $93 billion.
This is only the second monthly decline in nearly a year, breaking a steadily improving multifamily market.
Despite previous gains, the multifamily market has been hindered by weak demand in both the condominium and rental segments.
One key factor that might be slowing construction of new multifamily units is the government’s moratorium on rental housing evictions. Since the pandemic began, the Federal government has taken up a policy of helping renters to the detriment of rental property owners, by imposing a moratorium on evictions for failure to keep current with rent. Both Congress, under the CARES Act passed last year, and more recently, the CDC, have issued orders temporarily protecting renters from eviction if they miss a payment. These actions may be dissuading prospective rental property owners from new investment in rental properties.
Another contributing factor is that people are fleeing congested urban areas and multi-family dwellings for more spacious homes in the suburbs.
Current rental property owners who are facing losses due to the lack of revenue from their tenants may delay required maintenance on their properties. The current orders extend the moratorium provision through at least June.
The last component of residential construction, Homeowner Remodeling, saw spending bounce back by 2% in March to reach an annual rate of $242 billion. It is important to note that this remodeling data excludes other spending normally included with remodeling statistics. Dollars spent for regular maintenance such as fixing a roof, not the replacing of it, are not counted. Also, the data excludes any maintenance and remodeling of rental properties.
The total residential remodeling market, including these two significant items that aren’t within the equation, is estimated at approximately $352 billion, according to the Joint Center for Housing Studies at Harvard University. In other words, those two items represent $110 billion in construction dollars.
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