2023 Will Be Different

The last two years have been associated with an overheated economy. That has been both good and bad news for contractors. With fiscal and monetary stimulus pouring into the economy and lockdowns fading amidst widespread vaccinations and declining infections and fatalities, the economy took off in 2021. Real gross domestic product expanded 5.7% in American that year, which ranked the U.S. only 65th in the world as the global economy came back, too.

Construction backlog surged. What didn’t surge was the number of available skilled construction workers and the health of the global supply chain. In general, contractors were faced with too much demand chasing too little capacity, driving the cost of construction markedly higher and helping to support strong profit margins. Many industries faced such inflationary pressures, with overall inflation in the U.S. tallying 7.1% that year according to the Consumer Price Index.

The economy remained overheated in 2022. Year-over-year inflation peaked at more than 9% during the summer. It has been fading since and will continue to amid slowing economic growth and fading supply anomalies, but inflation remains well above the Federal Reserve’s 2% target.

Starting in March, America’s central bank began raising interest rates. Then more rate hikes came in May, over the summer, into the fall, and during winter. At the beginning of 2022, the maximum range for the benchmark Federal Funds rate stood at 0.25%. By year’s end, it was 4.5%.

Predictably, such jarring shifts in the cost of capital have impacted contractors. Coming into 2022, the nation’s housing market was positively frothy, with home prices racing higher in the context of low borrowing costs and ridiculously low inventory. Homebuilders strove to meet unmet demand by ramping up housing starts, only to find that the time to complete a home had expanded wildly due to a combination of diminished worker availability and component shortages, including a bewildering shortage of custom garage doors.

As the spring selling season ended and mortgage rates tilted higher, the froth quickly came off. According to Freddie Mac, in January 2022, the average 30-year fixed rate mortgage stood at 3.22%. Later during the year, that rate would rise above 7% before settling above 6%. On the West Coast and elsewhere, sales prices began to fall. Mortgage applications plummeted. Bidding wars disappeared. Homebuilders suddenly found themselves in a market characterized by a paucity of willing buyers. Many homes remain under construction, but at least some builders are likely to find themselves in a situation in which the price of homes being completed fall short of all the cost that has gone into them.

With fewer people willing or able to purchase homes given higher mortgage rates, momentum shifted to the multifamily market. Indeed, the combination of substantial job and wage growth coupled with the challenges of home purchasing have helped to drive rents higher. All things being equal, those are positive dynamics for multifamily construction.

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About the Author

Anirban Basu

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, MD. He is one of the Mid-Atlantic region’s most recognizable economists in part because of his consulting work on behalf of such clients as prominent developers, bankers, brokerage houses, energy suppliers, and law firms.

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