Builders haven't faced mass layoffs — at least not yet
Residential construction has fared better than some parts of the real estate industry, with an increase in jobs year-over-year.
- Residential construction jobs only dipped slightly in November as some builders pivoted to the custom home and remodeling markets.
- Construction job layoffs are expected in the coming months as interest rates remain elevated, keeping the market cool.
- While demand is currently weak, NAHB economist Robert Dietz said there is still a shortage of housing stock in the U.S.
The construction of new single-family homes has slowed, but that hasn't translated into large job losses in the industry.
Residential construction jobs were at a seasonally adjusted 902,000 in November, according to a Dec. 2 report from the U.S. Bureau of Labor Statistics. While down slightly from October's total of 905,200, it is significantly higher than a year ago, when the number of jobs totaled 875,000.
While holding strong, the number of residential construction jobs is expected to decline more significantly in the coming months, said Robert Dietz, chief economist for the National Association of Home Builders. There are plenty of single-family home building projects that were started earlier this year and are being completed, but new projects and permitting have slowed along with the rest of the real estate market.
The influx of new homes coming on the market now could spell good news for buyers in early 2023 as builders look to sell off inventory by cutting prices. In the third quarter, the share of newly constructed homes for sale was at record levels, as potential sellers of existing homes remained on the sidelines.
Strong demand for custom homes and remodels
Some categories of residential construction have remained strong, said Dietz. The custom home market and remodeling projects are doing well despite the slowdown, which could be a factor in blunting job losses. Dietz noted that the third quarter was the best for custom home building since the Great Recession, around 2008.
The slowdown in single-family construction might explain the relative strength of the custom home market. Earlier this year, there was high demand for custom homes, putting that sector in competition with the single-family market. As a result, it was harder to find workers and materials for custom home projects, so owners of undeveloped property put them on hold. Now, those projects can more easily proceed.
Homeowners may have delayed remodeling projects for similar reasons, especially as the prices of materials shot up due to supply chain issues. Interest in remodeling may also be a result of potential sellers deciding to stay in their homes — and improve them — rather than sell and give up their locked-in low interest rates.
Demand is weak despite a shortage of single-family supply
While construction job layoffs are expected to grow in the coming months as the glut of residential projects are completed, it's unclear how long before demand comes back.
Dietz said there is a disconnect on the supply side: Across the country there is a shortage of housing stock, but demand is weak because interest rates are elevated and home prices haven't come down enough to make the monthly mortgage payment affordable for many buyers.
"Either the Fed wins the fight against inflation, or we have a recession," Dietz said, noting that interest rates will need to ease when either option happens.
While it'll depend on what happens with the economy and inflation, Dietz expects interest rates to stop rising around March and start easing in 2024. Homebuyers shouldn't expect rates to return to the record lows of a year ago, but they should see numbers in the 6% range, Dietz said.
When new construction ramps up again, builders will still have to contend with material shortages and high costs along with rising demand. That may then lead to a decline in homeownership, particularly among younger people.
"Hopefully it will be a wake-up call for policymakers and they will look for ways to cut costs," Dietz said, referring to permitting and fees that go along with building residential units.
How will we know when real estate is on the rebound? Dietz said he'll be watching for a rise in residential building permits, increased confidence in builder surveys and positive comments from the Federal Reserve. Those tend to be leading indicators, while home sales and home prices tend to lag behind, he said.