The persistent labor shortage in the construction industry shows no sign of turning around, but there are some new pressures on builders going into 2019.
Interest rates have started to increase. The Federal Reserve has raised rates three times this year. As of press time, rates are between 2% and 2.25%, but a December increase was widely expected by economists. Dodge Data & Analytics anticipates between three and four rate hikes next year, which could bring interest rates to between 3.25% and 3.5% by the end of 2019.
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In early November, the 30-year fixed mortgage rate reached 5.17%, according to the Mortgage Bankers Association, and the 10-year treasury yield was over 3%, the highest level since 2011.
Materials costs aren’t going down either. As of October, the cost of construction goods inputs was up 7.9% year over year, while services inputs increased 5.2%, according to the producer price index.
The political landscape will bring new uncertainties next year. The governorship will remain in Democratic hands when Governor-elect Jared Polis takes over for John Hickenlooper in January, but several positions held by Republicans went to Democrats in November, including attorney general, secretary of state and state treasurer. Following the midterm elections, Democrats now have single-party control of the legislature, worrying some in the building industry.
“There is pent up demand among Democrats and their core constituencies for legislation and policies impacting the legal system, employment and workplace laws, and environmental regulations,” the Colorado Association of Home Builders noted in a statement following the election. “The CAHB and many of our industry partners have worked successfully over the past few years on bipartisan solutions to critical issues, highlighted by our efforts on construction-litigation reform. We are looking forward to educating new legislators and the Polis administration on the issues critical to home builders across Colorado.”
Slow growing in 2019
Dodge estimates that by the end of 2018, total construction starts will have increased 3% over 2017 to $807 billion, according to Robert Murray, chief economist at Dodge. While construction starts are increasing, they’re decelerating significantly. From 2012 to 2015, starts increased between 11% and 14% each year, Murray noted. Growth slowed to 7% in 2016 and 2017. Dodge predicts that next year, construction starts will be relatively flat at $808 billion.
“An important question going into 2019 is whether deceleration is followed by a period of high-level stability or a period of decline,” Murray said in a statement. “For 2019, it’s expected that growth for the U.S. economy won’t be quite as strong as what’s taking place in 2018, as the benefits of tax cuts begin to wane.”
Some of the stressors that hurt the building industry in the mid-2000s are gone, according to Dodge’s 2019 outlook report. For example, the glut of single-family housing and new retail space has dried up.
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“These types of imbalances are not yet present in the current construction expansion, lessening the likelihood that a sharp decline will take place, barring a crisis in the financial markets,” according to the report.
Murray expects to see an increase in short-term interest rates as monetary policy becomes more neutral, while higher inflation expectations in financial markets drive up long-term interest rates. He expects nonresidential construction to hold steady or increase, thanks to increased funding from state and local bond measures, and increased federal funding once appropriations bills for fiscal year 2019 are finalized.
“In this environment, it’s forecast that growth for construction starts will decelerate further, but not yet make the transition to the point where the overall volume of activity declines,” he noted.