I am increasingly seeing reports in the business media concerning the U.S. housing market. The question of the moment: "Is the U.S. housing market healthy?"
The momentum in the residential construction and real estate sectors has waned in recent weeks. I do not believe the moderate deceleration forebodes a recession in the foreseeable future; however, I have adjusted my forecasts for this year downward a bit.
On a macro-basis, this means I have lowered my forecast for total U.S. housing starts from a gain of 7 percent this year to a gain of between 5-6 percent. This may not sound like a big adjustment, but a disproportionate amount of the growth in 2018 already occurred in the first six months of the year. The growth rate will be more moderate in the second half.
In the second quarter of this year, there were 353,000 new houses started in the U.S. This was a gain of just under 8 percent when compared with the same quarter last year. And for the year to date, the total is also registering a gain of just under 8 percent.
But I lowered my annual forecast because the number of houses started in the month of June declined by 4 percent from a year ago. This monthly data can be volatile, so we may yet get some upward revision to this June number. But because of the strong seasonality in this data, the month of June always is one of the biggest months of the year for housing starts. Because of seasonal weighting, a significantly weaker than expected figure in the month of June likely portends a weaker than expected performance in the second half of the year.
Not necessarily a negative performance, mind you; it's just moderately weaker than expected.
The trend in the data for housing starts has run into some headwinds recently that are a bit stronger than expected. These include higher interest rates, higher materials and energy costs, higher labor costs and ongoing labor shortages in some regions, and increased difficulty and costs in procuring suitable building lots.
Thus, the affordability of new houses has diminished as all of these costs have increased. This is not so much of a problem at the upper end of the price range, because the more affluent buyers have a greater ability to pay the higher prices. But by far the highest volume of houses started in the U.S. are in the middle to lower end of the price range, and the market for these houses is more sensitive to a rapid increase in prices.
There are some positive economic trends at the present time that are mitigating the impact of the affordability problem. These include lower taxes, rising employment levels, rising wages and household incomes, and high levels of consumer confidence. The problem is that wage gains have not kept pace with the strong surge in home prices. Barring any unforeseen shocks, the market will adjust to these trends and the current situation will correct itself over time; supply and demand are always trying to reach achieve equilibrium. But this will take several quarters.
None of these trends, either positive or negative, are a surprise. In fact, they are all well established and heavily reported. But it is impossible to predict the future precisely regarding how a market will respond to all relevant forces. We can only monitor the data closely, continuously recalculate the probabilities and then make the appropriate adjustments to the outlook.
To illustrate what this means for manufacturers of plastic pipe, profiles and other plastic building materials, I have charted the rates of change in both residential construction spending and the industrial production of building supplies, excluding high-tech. Plastics building supplies are a subset of the latter category. The gaps between these two graphs are largely because the spending data includes spending on labor as well as supplies.
Nevertheless, a comparison of these two lines is instructive. For the past six years, spending for residential construction has expanded at an annual rate of at least 5 percent, and at times the annual rate of increase has exceeded ten percent per year.
During this time, the volume of construction supplies production in the U.S. has steadily increased by about 3 percent per year. Note that this chart shows rates of growth, so the relatively flat line for the construction supplies data indicates a steady pace of expansion. My sense is that this is a pretty good description of the national trend in demand for plastic building materials during the past few years: steady but moderate growth.
My concern is that the line for total residential spending has dipped below 5 percent and is heading lower. I expect this to put downward pressure on the pace of growth in overall demand for supplies in the second half of this year. My forecast continues to call for a gain this year in overall market demand for plastic pipe, profiles and decking, but the growth rate in 2018 will gradually decelerate from here.