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

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.

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.

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