2010 Residential Construction Outlook: A Split Decision

Several factors have turned favorable for single-family home construction.

There's some good news for residential HVAC contractors: residential construction markets are poised for a partial recovery in 2010. Single-family construction and improvements to existing properties should finally turn higher, while multi-family work continues to slump.

Several factors have turned favorable for single-family home construction. First, even with more than 10% of the workforce unemployed, there are still more than 100 million people with jobs, plus self-employed individuals and retirees who can afford a home. Roughly one million new households are formed each year, and 300,000 houses are destroyed by fire, flood, and neglect. In other words, there is demand for both replacement housing and additional units.

Mortgage rates have recently reached the lowest points in the history of Freddie Mac's weekly surveys, which date back to the 1970s for some series. Home prices have fallen to multi-year lows. This combination makes home ownership more affordable than it has been in years.

In addition, the $8,000 tax credit for first-time homebuyers — now augmented by a $6,500 credit for existing homeowners who have occupied their home for five of the past eight years — will give at least a temporary boost to sales of both new and existing houses. Currently, the credit applies only to sales contracts ratified by April 30, 2010, with closing by June 30. But Congress has already extended the credit once, and might do so again.

Even if there's an increase in the number of potential homebuyers with the demand and the means to buy, why would they buy new houses, when there are millions of unsold existing homes on the market? The answer is that even in heavily overbuilt markets, the houses on offer are not what prospective buyers want.

Many of the unsold houses are in formerly fast-growing markets that have lost their allure, such as Florida and southern Nevada. Other areas with excess inventory include hard-hit industrial states, such as Michigan. Homebuilding in 2010 is more likely to occur in regions that are still experiencing a population inflow, such as Texas; areas around military bases that are getting an influx of new military and civilian employees from the base realignment process; and central-city and close-in suburbs of large metropolitan areas.

Moreover, the stock of unsold existing homes masks what has happened to new home supplies. Homebuilders have successfully cut their inventories to less than a quarter of a million houses, down about 60% from 2007. With even a modest pickup in new home sales, many markets will be very short of new supply.

If home sales rise there will also be an upturn in renovations and additions to existing homes. Some would-be sellers will make improvements, hoping to make their homes more saleable. Federal tax, loan, and grant incentives will also help homebuyers invest in weatherization, energy-efficiency, and other heating- and cooling-related projects.

While these market segments strengthen, the multi-family market is likely to weaken further. Usually, a drop in home ownership helps the rental market. But in this downturn, many would-be renters have lost jobs or failed to get a first job after graduation, forcing them to double up or move back in with parents. In addition, the first-time homebuyer tax credit has enabled many existing renters to become homeowners, further depleting the stock of renters.

Finally, the overhang of unsold properties is leading many homeowners, builders and banks to offer houses for rent, at least until sales improve. It's likely that single-family construction will rise 20 to 30% in 2010, albeit from a tiny base in 2009. Spending on improvements could climb 5 to 10%. Multi-family construction will shrivel by 25 to 35% from already depressed levels. Putting these cross-cutting trends together, total residential spending should be 5 to 10%. That's not great, but it's a lot better than it's been the past four years.

Ken Simonson is chief economist, Associated General Contractors of America. He can be reached at 703/387-5313 or by e-mail at [email protected].

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