Condensed from FMI Annual Construction Outlook Publication

The U.S. single family residential construction sector of the construction market increased from $235.9 billion in 2000 to $246.5 billion in 2001. This 4% growth is the lowest annual increase in single-family construction since 1997. The value of construction put in place was expected to decrease 1% in 2002 and increase 3% in 2003. Forecasts are more optimistic for 2004 with a 6% increase projected.

Although this was a small increase, it was surprisingly strong considering the rough economic climate. When the economy was in recession in early 1990, the industry was not prepared. This time, however, due to tightened standards by bank regulators, increased financial sophistication by executives, and more favorable economic conditions the single-family market has remained strong through the recession and stock market decline.

The single-family residential market is usually hardest hit when the economy is in a recession. Normally, interest rates would be climbing, causing a decrease in home affordability. Favorable interest rates, higher incomes, and appreciation in house values allowed demand in this market to not only be sustained, but increase.

The poor performance in the stock market has also contributed to the surprising strength of the single-family residential market. Many investors are pulling their money out of the stock market and investing in real estate.

All that being said, the single- family residential market is volatile at best. 2001 started very strong and tapered off in the second half of the year. Every small change in inflation and interest rates has a large effect on this market. The outlook for the rest of the decade remains optimistic. Homeowner rates are higher for older groups, so as the population ages, there will continue to be high demand for homes. There will also be a higher percentage of homeownership among immigrants, minorities, and lower income groups causing the homeownership rate likely to exceed 70% by the end of the decade. FMI forecasters expect 18 million new homes to be built between 2001 and 2010.

The regional outlook will continue to shift away from the Northeast and Midwest towards the South and West. Most homebuyers will move to the suburbs, but lack of land availability will cause increased development in the cities and extend further from the cities.

Homebuilders will continue to face labor shortages. This lack of manpower will continue until the later part of the decade. Like the rest of the industry, homebuilders will need to concentrate on hiring, training, retaining, and compensating key employees. Key demographic groups in overcoming labor problems include immigrants, especially Hispanics, and women. Another key issue will be constraints on the use of raw materials.

FMI is a construction management firm delivering innovative, customized solutions to contractors, engineers, architects, and others in the construction industry. FMI’s consultants assist businesses with strategic planning, leadership and organizational development, marketing and sales, and a host of other business services. They have offices in Raleigh, NC, Denver, CO, and Tampa, FL.