Interest Rate Hike Not Expected to Dampen Strong Construction Market in the Short-Term But Risks are Increasing

The expected increase in interest rates came to pass as the Federal Reserve announced a quarter-point hike in the federal funds rate, the first increase since 2018. The Russian invasion of Ukraine and subsequent reactions by the West have increased the pressure on existing inflation concerns, and we are likely to see further interest rate increases over the course of this year and into next. But while this may traditionally have signaled a slowdown in the housing market due to higher costs, Ducker expects very limited short-term impact on the construction market, with residential activity in particular still on track for a strong year due to high levels of backlog and underlying demand drivers.

Demand Outpaces Supply at Builders Show 

Positive sentiment abounded at the recent International Builders Show in Orlando, as demand continues to outpace supply throughout the value chain, despite suppliers and manufacturers having to adapt to ongoing labor shortages and supply chain issues. Backlogs remain strong, which will translate to continued high levels of activity for at least the next six months. We anticipate a 5 percent growth in housing starts in 2022, driven by single family. But in the longer term, there are increased risks associated with potential conflict escalation and its economic impact, and Ducker’s downside scenario shows the potential for a significant pause and minimal short-term growth in housing activity.

The fundamentals for housing activity remain strong, and despite the increases in new construction over the past 2 years, a significant gap remains between housing supply and availability – ~340,000 units annually. Housing inventory remains at extremely low levels with continuing bidding wars and price appreciation, although this is expected to dampen in the second half of the year.

While multifamily has outperformed single-family for the past several years, multifamily starts are expected to flatten after a 21 percent jump in 2021. But opportunities will continue to occur particularly in nonurban area low- and mid-rise projects. Remodeling and home improvement activity, which lags home purchases, is expected to expand throughout 2022 from remaining pent-up demand, while stabilizing later in the year as consumers shift back to a more normal mix of spending.

Labor & Material Shortages Continue

Building product suppliers continue to deal with labor and material shortages which have led to extended lead times and pricing inflation with a domino effect through the value chain. While homeowners have had to wait months rather than weeks for the delivery or installation of many home improvement items, the same supply chain constraints have seen extended permit-to-build new construction cycles and an increasing gap between housing starts and completions.

These extended cycle times mean that corporate performance benchmarks will lag significantly behind headline market activity indicators such as home sales and housing starts. While construction materials price indices were up an average of 22 percent in 2021, we anticipate inflationary pressure from material costs to moderate in 2022, with declines in prices likely later in the year for commodities such as lumber and metals.

The nonresidential building sector is still recovering from the massive reduction in nonresidential construction starts in 2020, which reduced spending in 2021 but also impacts 2022. Starts were positive in 2021 and activity is expected to continue its positive momentum for the next several years.

View 2022-2023 Updated Industry Analysis & Outlook

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