Despite two years of declining in residential construction, the segment still accounts for almost 47 percent of the total construction market, down from its 2005 high of 57 percent. Although the numbers are expected to continue to dip in 2007, there could be an upswing in the near future. The residential construction put-in-place market will decrease 16 percent to $539 billion in 2007 and then increase by 3 percent in 2008 to almost $552.9 billion. By 2011, it is predicted to finally surpass its 2005 high at $668.5 billion.

The residential sector is actually three construction segments: single-family ($309.9 billion), multifamily ($64.7 billion) and residential improvements ($164.5 billion). The single-family segment accounts for 27 percent of the total construction market despite a decrease of 5 percent in 2006 and 25 percent in 2007. At its peak in 2005, it accounted for 38 percent of the total construction market. It is expected to pick up again in 2009.

The multifamily segment consists of apartments and condos. Although the condo market is down, it is still at a historically high level. Multifamily construction has cooled a bit in 2007, but should grow at a slow, steady rate through 2011. The residential improvements segment includes additions, alterations and major replacements, and is expected to grow steadily, with the long-term outlook for the segment looking positive.

Deep Impact
The single-family housing boom of the 1990s is just beginning to impact today’s improvement market. Baby boomers – the most affluent generation in history – will continue to fuel this segment. The annual rate of growth for the home improvement segment will reach 7 percent in 2011. This growth is large enough to help offset the losses from the single-family segment.

To predict put-in-place construction spending in the residential segment, several key economic indicators must be considered. The main economic indicators influencing the residential market are new home sales, personal consumer expenditure, gross domestic product and fixed-investment for residential.

Other important indicators for residential include building permits, housing starts, housing completions, home ownership rates, existing home sales, the National Association of Home Builders/Wells Fargo housing market index, mortgage rates and apartment vacancy rates.

Residential Construction Indicators
The press closely follows the Census Bureau’s data on building permits, housing starts and housing completions. Housing starts give us a very accurate look at the number of houses under construction. Despite a steep drop in housing starts, the decline in construction put-in-place will be mitigated somewhat by several factors. These factors combine to increase the construction value of each start. Labor and certain material costs continue to rise, and homebuyers are increasingly upgrading and using higher-end materials.

In August, private housing authorizations by building permits were at a seasonally adjusted annual rate (SAAR) of 1.3 million. This rate is down 5.9 percent from the previous month and down 24.5 percent from a year earlier. Authorizations for single-family units were down 8.1 percent from July at a rate of 926,000. Building permits for buildings with five units or more were at a rate of 324,000.  

Private housing starts in August were also at around 1.3 million SAAR. This rate is down 2.6 percent from the previous month and down 19.1 percent from a year earlier, making it the lowest rate in 12 years. Single-family housing starts were at a rate of 988,000, down 7.1 percent from July’s rate of 1 million. The August estimate for units in buildings with five units or more was 311,000.  

In August, private housing completions were 1.5 million SAAR. This rate is down 0.2 percent from the previous month and down 19.0 percent from a year earlier. Single-family completions were 1.2 million, up 3.4 percent from the previous month. The rate for units in buildings with five units or more was 254,000. That same month, new single-family home sales were 795,000 SAAR. This rate dropped 8.3 percent from the previous month and is down 21.2 percent from a year earlier. The median sales price for a home was $225,700, yet the average sale price was $292,000.

According to the National Association of Realtors, existing home sales were at a rate of 5.5 million in August down 4.3 percent from the previous month and down 13 percent from the previous year. This is the lowest rate since 2002. Median home prices increased 0.2 percent to $224,000.

The home-ownership rate in the U.S. reached its peak of 69.2 percent in both the second and fourth quarters of 2004. It has since fallen to 68.4 percent in the second quarter of 2007. This decline is mostly due to tightening credit from the subprime mortgage situation and a correction in the housing supply. The decline in the home-ownership rate implies that more people are renting multifamily units. Although this situation usually means a decrease in vacancy rates, it has yet to be seen because multifamily units have a longer construction completion timeframe, and a new wave of units has just come on the market. Condo-to-apartment conversions and an increase in the rate of single-family units being offered as rentals have also contributed to this situation. Due to the booming single-family residential market, apartment vacancy rates have been high in the past few years. They hit their recent high of 12 percent in 2004, but have since decreased to 10.1 percent at the end of the second quarter of this year.

Prime Time
The sub-prime mortgage situation is a hot topic right now. As interest rates increased, so too did monthly payments on adjustable rate mortgages, while property values slipped, leaving some homeowners scraping or unable to meet financial commitments to their lenders. Some lenders have even filed for bankruptcy or have closed as a result of the influx of foreclosures. Although foreclosure rates are indeed rising, a large increase on a small number is still a small number. The concern is that these rates are going to get much larger.

Mortgage rates hit historic lows in 2004 and were almost as low in 2005. Despite expert predictions and slight adjustments made by the Federal Reserve, rates have remained low. In September 2006, the 30-year, fixed-rate mortgage was around 6.3 percent. One year later, it remained the same.

The mortgage market is around $13 trillion. Sub-prime loans account for 23 percent of new loans and not-existing loans. The sub-prime market is estimated at $665 billion, which is about 5 percent of the total mortgage market. Of the sub-prime market, approximately 20 percent of the total issued during 2005 and 2006 is expected to fail. So, according to this, about 1 percent of total mortgages will fail – a percentage that is considered high.

The residential put-in-place construction segment is expected to decline in 2007 and most likely again in 2008. It is expected to recover in 2009 and to reach its previous high from 2005 in 2011. Housing starts, building permits, home sales and mortgage rates will give an indication of when the recovery starts.

The National Association of Home Builders/Wells Fargo Housing Market Index declined for the seventh consecutive month in September by two points to 20, reaching its previous low of January 1991. It attributed this decline in builder confidence to “concerns about the substantial inventory of new homes for sale and the effects that the deepening mortgage market problems are having on buyer demand.”