Construction
Industry Outlook
OUTLOOK: Structural Weaknesses
www.eulerhermes.us
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The residential housing market has begun to show a
sustained improvement in 2013 as a result of lower
inventory, rising prices, attractive financing to qualified
buyers, as well as an improvement in the general economy.
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Commercial construction has also begun to rebound but
not as quickly as the residential sector due to the large
number of vacancies and longer lead-times required to
complete new projects.
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Concerns about the Fed taper caused a run-up in mortgage
rates in the middle of the year. Higher rates primarily
manifested in a slowdown in refinancing activity but
also disrupted some of the momentum in the residential
market.
Homeownership is one of the most important factors to the overall state of the general economy as it is one of the largest purchases an individual will make in their lifetime and the home is usually a family’s largest asset. The residential construction industry was adversely affected by the burst of the housing bubble initiated by the subprime mortgage crisis and corresponding collapse of credit markets. The recovery began to gain traction in 2012 and that momentum has continued into 2013 as a result of greater consumer confidence, low levels of new and existing home inventories, and attractive financing options for qualified buyers. With sustained improvement in the residential segment and macroeconomic environment, the commercial segment is also likely to rebound, as businesses again begin to expand, and existing commercial inventory levels decrease, resulting in the need for new commercial construction.
Residential Construction
Residential construction declined substantially as a result of the Great Recession; construction slowed as a result of unsustainable lending practices, home values declined, and credit markets collapsed. The market began to see improvement in 2012 and that momentum has continued into 2013. However, the recent run-up in mortgage rates is creating volatility in the market. The Fed’s taper talk caused a rise in mortgage rates during the middle of the year. Existing home sales surged as on the fence buyers rushed in to purchase on fears of further rate increases. As it became clear that the tapering was not imminent both rates and purchasing activity declined. Conversely, new home sales collapsed following the interest rate rise before recovering lately as purchasers adjusted to the new environment. While these data points seem contradictory, we hypothesize that rising rates pulled forward hesitant buyers who were waiting for a bottoming of rates, while simultaneously discouraging buyers from entering contracts on new homes. Moving forward we believe housing will continue to recover as builder incentives, improving consumer confidence and good home affordability places buyers in a better position to purchase a home.
Overview
Existing Single Family Units New Single Family Units
6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2000 1.4 1.2 1.0 0.8 0.6 0.4 0.2
Disparity in Recovery of New and Existing Homes
Non-Residential Construction
The non-residential construction industry has seen declines of 8.5% annually over the past five years, as a result of decreased consumer spending, increased unemployment, and businesses downsizing or declaring bankruptcy. The industry began to see a rebound in 2012 due to improvements in the macro-economic environment and increased consumer confidence that has continued into 2013 with revenues expected to increase by mid-single digits. The recovery in this sector is not expected to be as quick as the residential sector due to a higher level of current commercial vacancies resulting from overbuilding that took place in 2005 and 2006, and that commercial projects tend to take longer to complete due to the large nature of these projects. As consumer confidence grows, unemployment decreases, and vacancies are filled, we would typically expect the need to new projects to satisfy growing demand. However, demand within the traditional brick-and-mortar retail space faces secular headwinds as consumers continue to shift toward online shopping, suppressing demand in this niche.
90 110 130 150 170 190 210 230 250 90 110 130 150 170 190 210 230 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Home Affordibility Index Home Price Index
Home Prices and Affordibility
Residential construction is expected to continue to rebound as the economy improves. However, the impact of rising mortgage rates is not yet fully known and could take steam out of the recovery. As buyers continue to return to the market due to low interest rates (on a historical basis) and good affordability, the resulting decline in existing inventory will drive an acceleration in new home construction. Thus far the recovery has been biased towards existing homes. While these represent the majority of home purchases, the slow recovery in new construction is limiting the contribution to the macro recovery due to the fact that new home sales have a much large multiplier effect as a result of the amount of materials, labor, furnishings, appliances and other ancillary goods and services that go into each sale.
Commercial construction is also expected to rebound over the next five years. The recovery will be slower than the residential sector as there is a large amount of vacant commercial property that needs to be filled before a sustained need for new construction is established. While the outlook for both the residential and commercial sectors calls for sustained improvement over the next five years, a downturn in the macroeconomic environment or a rise in rates substantially above current levels would imperil this viewpoint.
Outlook
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Office Rental Vacancy
800 Red Brook Blvd Owings Mills, MD 21117 Tel 877-883-3224 Fax 410-753-0952 www.eulerhermes.us
Euler Hermes North America
Insurance Company
www
.eulerhermes.us
Published 11/2013
Positive fundamentals & outlook Signs of weaknesses
Structural weaknesses Imminent or recognised crisis
KEYS TO SYMBOLS
Euler Hermes North America is the oldest and largest provider of trade credit insurance and accounts receivable management solutions. We offer both domestic and export credit insurance policies that insure against commercial and political risk in more than 200 countries worldwide. Euler Hermes maintains a database of proprietary information on more than 40 million companies worldwide and is rated A+ (Superior) by A.M. Best and AA- by Standard & Poor’s.
