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One key data line that is flagging a path to recession is the loss of residential construction workers. The number of workers who build single-family and multifamily homes and do remodeling work tend to decline before every recession as higher interest rates dispositionally impact the economy through housing.
While the unemployment rate has increased recently, jobless claims have yet to rise to a level that warrants a job-loss recession. But one employment sector in particular can potentially push jobless claims higher and thus push the unemployment rate to 5% or higher.
Today, housing starts activity is at the levels we saw during the brief pandemic-fueled recession of 2020. Also this week, The Home Depot warned that remodeling jobs are slowing down. The trend here is clear and has been for many months. A while back, HousingWire Editor in Chief Sarah Wheeler and I discussed the risk of recession due to a lack of construction labor.
Let’s look at today’s residential construction report and see where we are.
From the U.S. Census Bureau:
Building Permits
Privately-owned housing units authorized by building permits in July were at a seasonally adjusted annual rate of 1,396,000. This is 4.0 percent below the revised June rate of 1,454,000 and is 7.0 percent below the July 2023 rate of 1,501,000.
Housing Starts
Privately-owned housing starts in July were at a seasonally adjusted annual rate of 1,238,000. This is 6.8 percent (±10.3 percent) below the revised June estimate of 1,329,000 and is 16.0 percent (±10.5 percent) below the July 2023 rate of 1,473,000.
I want to make this article very simple to understand. If you look at the charts below, we are basically at recession levels today. But during this entire time, the number of residential construction workers has been growing. Why is this happening?
A few reasons have made this economic cycle unique and have been driving the recession callers crazy since 2022.
1. We have a large backlog of housing orders in this cycle.
2. It takes an average of 21 months to finish a five-unit project. That’s a long turn time to start and finish a project, which kept people employed longer than usual.
3. Large publicly traded homebuilders have gross profits margins above 20%, which means they can buy down mortgage rates to sell homes.
4. New listing data has been at historically low levels for the past few years. Many people who have remodeled their homes are living there longer.
5. There are many new homes that have been permitted but yet to be started as builders are mindful of higher rates. They get more positive when rates fall, which keeps the labor pool high for this rebound in demand.
Things have changed of late. Housing construction data is at recession-like levels, single-family permits are still falling and remodeling activity is slowing down. As more units are completed, and unless more starts occur, we are getting closer to not having such high employment levels for construction workers.
Conclusion
For single-family permits to start rising again, we will need lower mortgage rates. With rates on a steady decline since June, we have seen a slight improvement in the forward-looking data from the homebuilder sentiment survey.
But to get things moving again and ensure that people stay employed, we need lower rates for longer and to avoid a return to the world of 7% to 8% rates. These aren’t doing the smaller builders any good.
It’s a bit more complicated for the multifamily (5+ unit) construction world as their financing isn’t so directly tied to 30-year mortgage rates, and rent growth for apartments is cooling. In places like Texas and Florida, where inventory is growing faster than the rest of the country, we see more softness there than in other locations.
So, if the Federal Reserve wants to prevent jobless claims from rising and the unemployment rate from rising due to job losses, it will need to get housing back. The existing-home sales market has been in recession since June 2022, but the new-construction sector is not there.
