Construction and Homebuilders: Economic Trends Developing in the Real Estate Space

Last Edited by: LPL Research

Last Updated: March 02, 2023

LPL Research Street View image

Summary:

What does the latest construction activity tell us about the real estate sector and inflation? In this edition of LPL Street View, Dr. Jeffrey Roach, Chief Economist for LPL Financial, gives investors some highlights on what trends are developing in the real estate space.

Multi Family Construction on the Rise chart

Dr. Roach begins with some highlights from the latest construction spending and what this would mean for homebuilders and inflation.

We continue to see a divergence of construction activity between single-family versus multi-family dwellings and clearly, growing multi-family construction activity is a good sign for renters in the U.S.

The growth in condo and apartment construction means the supply of multi-family units will increase this year as more projects come to market. New multi-family projects will likely dampen rents as more properties come online this year.

So the bottom line is this: rent prices will likely come down this year as supply of units grows. Industry data already shows declining rent prices, so it’s just a matter of time before the official government statistics reflect the easing in rents. Investors and policy makers alike should expect a softening in housing-related inflation in the coming months.

Now from a company perspective, firms that are broadly diversified will likely benefit from greater activity in multifamily construction activity. This may be a reason why conditions are improving across the various components of the National Association of Home Builders Index.

And by the way, a bottom in builder sentiment would be a bullish sign for stocks. Four of the five major bottoms in the home builders index since its inception in 1985 occurred near market bottoms. You can see Adam Turnquist’s February 17 blog post on that topic.

Now, four of the five periods also overlapped with a recession. The exception was the bottom in 1995, which coincided with the Fed’s successful effort to slow the economy without inducing a recession. This is something Dr. Roach discussed in this week’s Econ Market Minute, which you can view on the LPL Research YouTube channel.

Despite all of the underwhelming housing data, the Dow Jones U.S. Home Builders Index broke out from a bottom earlier this year and seems to be holding steady. Relative strength for the index remains somewhat bullish as the index has been outperforming the S&P 500 since April 2022. It’s important for investors to remember that despite weakness within the single-family sector, activity in the multi-family space is strong, and the equity indexes seem to corroborate with that thesis.

Please continue to follow LPL Research on Twitter, LinkedIn, and YouTube for up to date analysis on the investment landscape.

You may also be interested in:

Read. Listen. Watch.

Keep up with economic insights from the LPL Research team. Read Weekly Market Commentary. Listen to Market Signals Podcast. Watch Street View.

LPL Newsroom

Thought leadership. Advisor stories and tips. And, Research. Find the latest insights from advisors, what’s new for advisors, and the latest from LPL Research.

LPL’s Thought Leadership Series

Throughout the year, LPL’s Thought Leadership team takes a look at those things that impact and help advisors, providing advisor stories and advisor solutions.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data is from FactSet.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 

Member FINRA/SIPC

For Public Use — Tracking #1-05362397