It’s likely that President-Elect Joe Biden will be working with a divided government, as Democrats have a smaller majority in the House and two Senate runoff elections won’t be decided until January, according to Richard Branch, chief economist for Dodge Data and Analytics.
Consequently, “we’re unlikely to see any broad or sweeping legislative action coming out of Washington at some at any point over the next couple of years, in terms of some of the things that I think are critical for us in the construction industry.”
Branch spoke during the 82nd Annual Dodge Construction Outlook Conference, which was held virtually on Tuesday. He anticipates there will be an additional round of stimulus early next year. Dodge had projected a potential stimulus of around $1.5 trillion in the first quarter, but “given how the election turned out, that’s probably more on the maximum side” of what could be expected.
Total construction took a hit in April, and has had an uneven recovery since then, Branch noted.
“That’s representative of the kind of recovery that we think [will unfold] over the next year or so,” he said. “We’ll continue to make that modest progress, but for every couple of steps forward, I think we will take a step back.”
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Total construction peaked in the fourth quarter of 2019 and hit a trough in the second quarter, according to Branch. “What that means is that cycle that began way back in 2011 is actually over because we measure a cycle from a trough to trough,” he explained.
Although there have been longer construction cycles, he said, this one was notable because it covered a period of “lackluster” single-family home growth. That’s changing in the current cycle. In fact, residential is one of three sectors out of the 22 that Dodge tracks where growth is expected, Branch said.
“When we look at third quarter data for single-family units, over 1 million units broke ground on a seasonally adjusted annualized rate. That was the best quarter for single-family housing going all the way back to 2006,” he said. “It’s clear that lower mortgage rates are clearly overpowering any labor market or economic concerns that exist.”
While there’s plenty of demand, builders need to be aware of constraints on the supply side, Branch said.
For one, the labor shortage hasn’t eased up, despite widespread job losses in other industries, while land costs and zoning issues limit where homes can be built. Building material prices are increasing, particularly softwood lumber and plywood, which have seen double-digit growth, Branch said.
“We think that those supply constraints essentially put a cap on the growth potential here for 2021,” Branch said, adding that Dodge expects a 6% gain. However, “of all the sectors that we’re talking about today, one that has the most upside potential would be the single-family market.”
Total residential construction, including single- and multifamily, is up 3% nationwide, Branch said, but building is shifting to medium and small metro areas, Branch said, as the pandemic drives buyers out of larger, denser areas. Building in those two regions have grown between 8% and 10% on a year-to-date basis.
“The pandemic is clearly opening up a whole new opportunity of living arrangements for those folks who have that flexibility to work from home,” he said.