Construction slowdown inevitable due to demand shortage
Whether construction slows down in 2022 is another question entirely. Projections are that starts are to continue growing by a healthy 4.3% in the coming years. It is clear that if the Residential market cannot overcome its hurdles, it will not be able to achieve its full potential. Here are a few factors to consider. First, there are many factors that can affect the performance of the Residential market in 2022.
Construction starts are expected to grow by a robust 4.3% in 2022
Expansion will potential be on the rise for the construction industry in the coming years. Fueled by low interest rates and strong consumer spending. According to Dodge Data & Analytics, the construction industry’s momentum index is growing and balanced toward most types of building projects. It is also rising, with the number of general projects currently in the bidding process exceeding the level of the prior year. Stats based on an $1.2 trillion dollar infrastructure bill.
The report from Dodge Data & Analytics also offers some guidance for the future of construction. Specifically, it examines how current construction activity will fare and forecasts for the next five years. The report explains that construction is likely to continue growing, despite the challenges faced by the economy. In addition to residential construction and nonresidential construction. With activity expected to increase. With starts growing on average by 34% in 2020 and 17% the following year.
The data leading up to 2022 is unlike anything we’ve seen before. While the backlog is declining in 2022, it was up in 2020. This largely reflects the fact that the decline in 2020 was so large that the backlog didn’t recover in time. However, strong start increases at the beginning of the year is expected to help the construction industry. By building backlog and spending money. Meanwhile, spending on public works and highways will be up a healthy 6% to 8% in 2022.
While new residential construction starts are up +2% in 2022, nonresidential building activity is up – but not as much as residential construction. However, the increase in nonresidential building activity will only represent about 10% of new residential construction. Nonresidential construction starts are up – but still down compared to last year. While both residential and nonresidential construction starts are up, the backlog is down -8%.
Single-family residential activity started off slowly in 2020. But was to pick up again in the 2021 year. Housing markets are still challenged with increased interest rates and home prices. The Millennial generation is primed to buy a home. While construction activity may increase as housing prices stabilize in 2022. In 2023, predictions are that construction is to grow by an average of 1.118 million homes.
Despite the growing number of construction projects, employers, and the industry face a critical labor shortage. Currently, there are a number of construction workers are on Unemployment. The Housing for All plan sets ambitious goals for the residential sector. But, there is a growing shortage of construction workers. The market expects to need an additional 55,000 workers to meet the demand.
House building is expected to remain buoyant
According to the latest quarterly forecast from the Construction Products Association (CPA). House building is expected to stay buoyant in 2022 and 2023. While there is no indication of a return to pre-pandemic levels. The industry is set to increase at a modest pace. Possibly driven by infrastructure spending and private house building. Making the forecasts for 2022 and beyond considerably more optimistic than those of Hewes & Associates.
Although the re-balancing of the construction market has reduced the risks of oversupply, house building will remain a priority for those in power. The shut downs has accelerated demographic trends and required a new supply model and product. These changes have created new investment opportunities. While the commercial sector will continue its re-balancing process. With high streets redeveloping to reflect changing consumer shopping habits. And, in addition to this, the future of office-based work is also changing what investors and developers offer.
The housing market remains steady, but cutbacks may cause house prices to rise. The US is currently under-building by about four million homes, which coincides with the peak years of millennial home buyers. Currently, there are only 1.55 million housing starts, well below the 1.73 million starts from March. Inflationary pressures and various threats to the economy could also crimp house building.Engineers stated in 2021 that US infrastructure repair alone could cost over 2.6 trillion alone.
Rising interest rates are a concern for the UK housing market. Interest rates could go up to 0.75% by 2022, but the effect is likely to be gradual. A shortage of new homes will continue to hamper housing construction for a while, and rising construction costs may hinder future supply. If house building activity is at a low level, prices may continue to rise. In the meantime, the lack of new homes will create a demand for older homes and smaller communities.
While the demand for homes has slowed in recent years, a lack of supply should continue to fuel the market. Meanwhile, millennials and Gen Z will be purchasing second homes. Renovation booms will hopefully spur the industry. Expectations are that the housing market is to remain buoyant for the 2022 year. Mostly due to low supply and strong demand. Unfortunately, there is growing concern that the economy will grow at a slow pace.
With rising interest rates, the housing market could become more stable in 2022. However, many potential home buyers stayed put and saved for the year before buying a home. As a result, the supply/demand equation may shift again. As a result, many first-time buyers will be pounced upon in the coming year. This could lead to higher prices and a booming housing market.
Residential market won’t reach its potential if it doesn’t overcome challenges
The Residential market will not reach its full potential in 2022 if it fails to overcome challenges. The lack of inventory will continue to hamper demand, which will keep prices high. However, rising wages and employment will increase demand. Additionally, a shortage of supply will affect the first-time buyer market, which will make prices even higher. As a result, the Residential market will continue to remain a seller’s market. Until enough homes are built to meet the increasing demand.
Rising interest rates will be another challenge for the Residential market in early 2022. While a rise in interest rates will dampen the market’s exuberance, it shouldn’t cause prices to fall significantly. In fact, rising rates may keep prices steady. Considering prices could shift back to more rational behavior. However, rising mortgage rates will be a major concern for buyers.
Rising home prices and rising rents will continue to present significant affordability challenges for home buyers. With incomes projected to rise 3.3%, many home buyers won’t want to miss out on the current low rates. While companies will be slow to announce their plans to reduce headcount and focus on flexibility, the increased number of remote workers will make it easier for home shoppers to find a new place.
High barriers to entry will continue to hinder the residential market in 2022. Rising rents and costs are already a major concern in the current market and will continue to do so in 2022. Despite the increased competition, the demand for housing will still be too high for affordability, and solutions for this problem will be the focal point of attention. However, if the Residential market doesn’t address these issues in 2022, it could miss its full potential.
Another key challenge will be the lack of inventory. While the number of active listings is down 55% from November 2019, the low inventory is a major limiting factor. With such high demand, sellers won’t want to list their properties if the market is unable to meet their needs. A lack of inventory could limit housing production and cause price increases. However, this is unlikely to happen as long as those in power are willing to support home builders and home buyers.
Rising interest rates will continue to cool the market, but they will only slow it down slowly. A spike in interest rates will only cause home prices to plummet dramatically, which is unlikely. If rates spike too much, a large amount of homes will flood the market. Which may be unlikely, but worth preparing for such an eventuality. The market is not as weak as it seems, but it’s still worth moving aggressively if people find something they love.
Despite the risks of inflation and rising interest rates, the Residential market will most likely hit new highs in 2022. According to an Attom Data Solutions report, the average sale price of a home last year was $94,500 – a 44.9% return on the initial price. Despite the challenges, 2022 will be a banner year for the housing market, with more single-family starts. Considering rising construction costs, inventory will remain low and prices will increase. Ultimately, the lack of inventory is one of the contributing factors to the low chance of a housing crash in 2022.
But, with predictions stating that building is to slow down due to lack of resources. The following years may be in question.
Provided by Antonio Westley
Disclaimer: This article is meant to be seen as an overview of this subject and not a reflection of viewpoints or opinions as nothing is definitive. So, make sure to do your research and feel free to use this information at your own discretion.