For decades now, I have written columns and made industry presentations around the country that talk about the one, sure-fire driver of construction in America: population growth. Yes, the long, historical graph line has a sawtooth to it, but generally speaking, it is the population growth in our country that has driven construction growth, as we build homes to house our growing population, as well as construct shopping centers, office space, hospitals, schools and all the other support structures that are a necessity to sustain a population.
We are a nation of immigrants, going back to the Mayflower. The boom in immigration growth peaked through Ellis Island almost 120 years ago and is where so many of our grandfathers and great-grandfathers emigrated to America, representing ethic and religious groups that spanned a huge cross-section of the world’s population.
They left Europe, Asia and the Middle East in droves to come here in search of the American dream. And that trend continues today – collectively as a group, the growth in population is the single largest factor in spurring our expanding construction economy, as that cohort is an important factor in household formations.
Fannie Mae. The Fannie Mae Home Purchase Sentiment Index (HPSI) is one of the many metrics we follow in gauging the health of construction in general, and housing in particular. The most recent report shows the index decreased 3.6 points in February to 58.0, breaking a streak of three consecutive monthly increases and returning the index closer to its all-time survey low set in October 2022.
Overall, four of the HPSI’s six components decreased month over month, most notably those associated with job security and home-selling conditions. While both components remain positive on net, in February 44% of consumers reported that it’s a bad time to sell a home, up from 39% last month, and 24% expressed concern about losing their job in the next 12 months, up from 18% last month. Year over year, the full index is down 17.3 points.
The decline was partly driven by a substantial decrease in consumers’ sense of home-selling conditions, with most respondents who indicated it is a “bad time to sell” citing unfavorable economic conditions and mortgage rates as the primary reasons for that belief.
With home-selling sentiment now lower than it was pre-pandemic, and home-buying sentiment remaining near its all-time low, Fannie Mae reports that consumers on both sides of the transaction appear to be feeling cautious about the housing market. That seems to support their expectation for subdued home sales in the coming quarters. Additionally, this month’s survey indicated an increase in job security concerns, which we’ll continue to monitor closely, since labor market uncertainty could play yet another factor in slowing housing activity.
Different Metrics. But while the above seems to reflect the view over at Fannie Mae, the National Association of Realtors has a very different view, drawing on a different set of metrics that dovetail with my view of a growing population driving household formation. In 2022, 2.06 million households were formed, marking the highest level of yearly household formations in the past decade, and bringing the total number of household formations from 2012 to 2022 to 15.6 million households. During that same time period, just 13.1 million housing units were started, and 11.9 million were completed, with 8.5 million being single-family units and 3.4 million being multifamily units.
This resulted in the gap between single-family home construction and household formation growing to 6.5 million homes, according to the analysis. The gap shrinks to just 2.3 million units when multifamily statistics are included. However, an average of 94.5% of all multi family units were intended to be used as rentals through the first nine months of 2022. At the end of 2022, multifamily housing starts represented 35.1% of all housing starts, the highest level since 2015.
While housing sentiment may be down, the economic realities of household formations and the demands it will have on all forms of construction bodes well for the near-term future of construction aggregates.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at [email protected]. Follow him on Twitter @allenvillere.