Despite ROAD Act passing, no construction boom is coming

The recently passed 21st Century ROAD to Housing Act got a lot of love and attention, as it is supposed to be the first step toward building a lot more homes in America. But as is often the case, what politicians promise can be more hype than reality, and I believe this is another example.

My bias is that I don’t fundamentally believe the U.S. can have a housing construction boom unless housing demand takes off stronger than anyone currently thinks. While the bill could have some positive effects when it comes to manufactured housing, the expectation of significant changes for traditional homebuilding needs a reality check from the data.

Homebuilders aren’t excited

Back on planet earth, the people that actually build homes in America aren’t really excited about building more homes, as the laws of supply and demand economics are winning here. As always, the builders are here to make money; they’re not the March of Dimes. Today the builders’ confidence data was released, and lets just say, it’s not looking very positive.

Residential construction data looks almost recessionary

When people say housing represents the business cycle, they mean that the housing market typically goes into a recession first, before the broader U.S. economy does. That’s correct, but only if you use the proper data.

This is not about existing home sales or home prices. We have had many recessions post-World War 2, but if I take 2007-2011 out of the equation, home prices haven’t fallen by 1% or more in any other year, even though we had many recessions. In 1990, prices fell by 0.7%, and in 1991, they fell by 0.2%. 

In my economic cycle work I focus on residential construction, because the number of residential construction workers typically falls before every recession. Although most people are always working during every recession, certain sectors typically get hit harder. This data line doesn’t look recessionary yet, but it looks very weak.

So, the builders’ confidence data is bad and the residential construction side of the equation looks like it’s about to fall even more.

Housing starts

The majority of housing construction is single-family homes; we did have a mini multifamily construction boom in America during COVID, which wasn’t much in historical terms but better than the pre-COVID era. That has ended now, and rental vacancy is up from lows, with a lot of distressed landlords in the pipeline as loans recast.

However, when we look at housing starts with single-family homes, it’s not looking good either. That means we now we have falling builder confidence, falling housing permits and starts, and residential construction workers on the verge of flagging a U.S. recession. This should be a wake-up call for those saying a housing construction boom is coming.

Too many completed units of supply

When I say the builders aren’t the March of Dimes, it’s because they have to manage their supply-and-demand economics tied to their cost and profit-margin models. So, typically, when total completed units of sale are above 120,000, they’re not enthusiastic about building more homes.

And here is the most recent home sales data.

My job as HousingWire’s Lead Analyst is to connect the dots so we can all be the detective and not the troll, and the charts above give everyone a sense of the reality of how life in America works.

Back in June of 2021, I cautioned everyone that when rates rise, the housing construction boom will end. The builders have done an admirable job keeping new home sales elevated by buying down rates; without that reality, housing construction would be a lot worse today. However, their profit margins have limits, so the point of today’s article is to show you how the housing market has operated for decades, and no law is going to change this unless the math and the money make sense for the builders.