20 Apr 2023 Construction industry outlook
Authored by RSM US LLP, April 20, 2023
Interest rates pose challenges for builders, but opportunities are on the horizon
Residential construction sees a favorable long-term outlook despite ongoing challenges affecting the housing market.
After a drastic shift in the second half of 2022, the housing market started with a strong foothold in 2023 once builder sentiment rose following reports of an early spring selling season and stronger-than-expected sales.
The outsize impact of interest rates
Last year, mortgage rates climbed much more rapidly than expected, reaching nearly 7.5% in September after starting the year below 3.5%. The rapid rise in mortgage rates led to a substantial slowdown in demand, as potential homebuyers could no longer afford monthly mortgage payments.
This increase caused many to rethink their buying decisions and created housing affordability issues across the United States.
Affordability remains a top concern for the housing market as monthly mortgage payments (assuming a 20% down payment) are up 38% from a year ago for a median-priced new home and 40% for a median-priced existing home. Despite these increases, pent-up demand, the use of builder incentives and some easing in mortgage rates have brought some consumers back to the market.
Still recovering from global financial crisis, construction faces ongoing setbacks
The construction industry continues to be hampered by limited availability of skilled labor.
The Great Recession was a once-in-a-generation event that resulted from the global financial crisis of 2007-09, set off by the U.S. housing market crash that sent the construction industry into a downward spiral. It was not apparent then that these events would continue to define the next two business cycles and make a lasting impact on future generations.
Residential and nonresidential construction was slow to rebound coming out of the recession. Developers, homebuilders and construction companies approached each deal with a heightened degree of caution intended to shore up macro-level support.
While added caution helped to mitigate risk, it also led to a dearth of new housing, with annual starts and completions sustained at a rate of 1.5 million units. The result was low housing inventory and a decline in rental vacancy rates leading up to the COVID-19 pandemic.
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This article was written by Nick Grandy, Crystal Sunbury and originally appeared on Apr 20, 2023.
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