A Look Ahead at the Builder & New Construction Market in 2016

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NewConstruction Title SourceIn many ways, the builder and new construction market set the stage for the real estate market. From housing stock, to valuation, to how a new generation of Americans lives, residential construction is key. In this post, we take a look at four factors that will shape new home construction in 2016.

How Buyers Want to Live

Homebuyers have long had a list of must-have new construction amenities. For 2016, builders are expecting to focus on a few key areas that they anticipate winning buyers over, including building location, type of construction, and lifestyle factors.

In terms of the type of new homes buyers want, single-family construction continued to dominate the building sector with growth of 11 percent last year. This year, the NAHB is expecting a further 27-percent increase in single-family housing starts, for a projected total of 914,000 units.

Buyers also still show a preference for suburban life over the bustle of urban living and the distance issues of rural living. “As we get into the recovery, suburban areas are growing faster than urban areas,” Ralph McLaughlin, a housing economist for Trulia, told the NAHB in October. “That is a sign that the urbanization trend we saw start to happen at the beginning of the recovery was more of a blip than a new rule.”

Lifestyle is also on builders’ minds as they plan new projects. At this year’s International Builders’ Show last month in Las Vegas, one notable presentation made the case for more homes incorporating universal design. Kevin Gillen, a chief economist for Meyers Research, pointed out that with an aging baby boomer population and the growth of multigenerational households, it makes sense for builders to design homes that fit everyone’s needs. Moreover, studies from the American Institute of Architects and the National Association of Realtors agree walkable communities are increasingly popular for homebuyers in all age brackets.

What’s Working for the Construction Sector Right Now

All in all, many in the residential construction industry expect 2016 to eclipse the growth of 2015. In his IBS talk last month, Gillen told builders to take advantage of what opportunities they could, while also doing more to educate younger audiences about homeownership benefits. The NAHB predicts a number of factors, including jobs and economic growth, “pent-up” demand, low mortgage rates, and still-affordable home prices will ensure an “uphill trend” for 2016. Even experts in the slowing multifamily sector believe there’s “a lot of runway remaining” this year.

For some industry insiders, a strong opportunity exists in the remodeling sector, particularly for luxury customers. “At that market level, they’re spending money,” Bob Ernst, president of the Building & Remodeling Association of Greater Boston, told Construction Dive Magazine.

“We’re encouraged by recent data that shows consumers have a strong desire to invest in their homes,” added Mike Horn, vice president of Lowe’s ProServices, who reported home improvement spending was outpacing overall spending increases. After rising 6.8 percent year-over-year in 2015, the NAHB has forecast a further 6.1 percent growth for residential remodeling in 2016.

Builders are also excited about an expanding availability of high-tech tools, according to Construction Dive. Building Information Modeling (BIM) technology, now more widely available for smaller building firms, is increasing efficiency and collaboration between teams. Also on the rise is laser scanning technology, which aims to find and address building issues more quickly.

What Factors Are Hampering Builders’ Growth

Despite this year’s anticipated growth, builders are all too aware of issues hampering industry growth. The NAHB characterized the industry’s primary issues as “supply headwinds,” including the cost and availability of skilled labor, lot availability, and concerns over the rising costs of building materials.

A survey last December found U.S. architecture, engineering, and construction (AEC) firms are struggling to find workers at all skill levels. After a “mass exodus” of labor during the recession, AEC firms reported it takes longer to fill positions, with that issue sometimes leading to project delays or firms being forced to turn down projects.

A lack of experienced site managers for larger projects is also leading to more accidents and increased regulatory attention, according to Construction Dive. Manhattan regulators launched a task force last summer to investigate “wrongdoing and unsafe practices,” while the federal Occupational Health and Safety Administration (OSHA) has increased its fines for violations for the first time since 1990.

It’s an environment that has led to a more cautious building industry, according to Construction Dive. “[Companies] are not going to overeat,” Chris Kennedy, vice president of Suffolk Construction, told the magazine. “They’re only taking the work they can handle.”

What Other Sectors Are Saying About This Year’s New Construction Market

With so much riding on residential construction, it’s no wonder other parts of the real estate world have their opinions about what builders should be doing. Some are more optimistic than others.

Realtors want more homes, saying housing stock increases is a “deep need” for the industry. Realtor Dean Vincent points out the latest National Association of Realtors (NAR) survey says three out of four American households would buy a single-family home if there were options available in their price range. “It’s time homebuilders double their focus on constructing single-family homes,” remarked Lawrence Yun, chief economist for NAR, about the survey.

Government regulators are also looking to improve the construction side of the market. The Federal Housing Administration surprised the industry with immediate changes to its condominium financing rules last November. “Condos are often the most affordable option for homebuyers, especially first-time buyers, and making sure FHA financing is an option is important to supporting homeownership,” Chris Polychron, president of NAR, told National Mortgage News last fall.

Investors, meanwhile, remain quite upbeat about the prospects for growth in 2016. Many fund managers believe the housing-related stock rally is not over. They point to January’s existing home sales numbers, February’s positive housing starts numbers, and positive home sales price data from March as evidence.

“I’m bullish,” said Rich Heidemann, a U.S. housing analyst with Waddell & Reed. “We’re below the normal cycle of housing starts, household formation is picking up, and prices are rising — these are all things that get me excited about the space.”