First Quarter Economic Update

Green shoots everywhere, but tariff impacts unknown

by Patrick Duffy

By almost all measures, the U.S. economy continues to strengthen, for the 3rd-longest recovery of 33 different business cycles since 1854. As of mid-April, GDP growth is estimated to have risen by 2.0 percent during the first quarter of 2018, but was recently downgraded with concerns about potential trade wars. This growth rate compares to 2.3 percent in 2017 and 1.5 percent in 2016.

So far this year, inflation is being tamed by regular, planned rate hikes by the Federal Reserve, although the March Producer Price Index showed an annual growth rate of 3.0 percent, which suggests that businesses are facing higher costs before passing them onto consumers. While job growth did dip to 103,000 positions in March, the first quarter’s monthly average of 202,000 is still up by nearly 14 percent from the same period of 2017.

The tax cut, which has taken effect as of January 1st, besides giving an extra boost to corporate spending, has also led to an increase in the personal savings rate of consumers, rising one full percentage point directly before and after the law took effect. Not surprisingly, this extra kick in paychecks has sent consumer sentiment soaring to highs not seen since just after the turn of the 21st century.

This has been, in essence, a Goldilocks economy: Running just hot enough to warrant gradual interest rate hikes to keep it from overheating while still providing consumers both the spending power and the confidence for optional purchases including homes, autos, travel and entertainment.

If there is a concern on the immediate horizon for the building industry, it’s the impact of tariffs on the economy in general, and homebuilding in particular. Prior to the tariffs of three to 24 percent assessed on Canadian softwood lumber, new home prices were based more on factors such as location, quality and competition than construction costs alone. Since then, however, prices have risen sharply, with the pricing premium for new versus existing homes rising to 35 percent, when 10 to 20 percent has been closer to the historical norm.

The cost increase has also had an impact on home sales, as more existing homeowners looking to upgrade stay put until more new home options become available. More recently, ‘panic buying’ of foreign steel and aluminum to beat additional tariffs was mentioned by an Institute of Supply Management Report, driving up short-term prices and causing inventory shortages for spot buyers.

For their part, homebuilders are doing everything they can to ramp up production, with March building permits and housing starts up 7.5 and 10.9 percent, respectively, compared to a year ago. Yet most of these gains were for multi-family homes, pointing to continuing challenges including not just the Canadian tariffs, but also finding suitable land and construction labor. In addition, with a recent report noting that average pay in construction is now nearly 10 percent higher than for all private employees, these extra costs must either be absorbed by the builder or passed along in the form of higher prices.

Even with higher prices, however, one area in which builders have the upper hand over most existing homes is with green building. According to a study by the global consultancy Booz Allen Hamilton, green building was projected to grow at over 15 percent yearover- year from 2015 through 2018, not only outpacing overall construction spending, but also showing a significant impact on GDP, employment and earnings over the previous three-year study period. More specifically, this growth would support an additional 3.9 million jobs and generate over $303 billion to GDP.

Green building is also a great investment in the future. According to a report made to the California Sustainable Building Task Force, upfront spending of two percent of overall construction costs can, over a structure’s lifetime, yield savings of more than 10 times the initial outlay.

For new homes, estimates during the first quarter of 2018 would indicate year-over-year sales activity up by about 0.5 percent, with prices rising by 4.6 percent. In the larger, existing home sales market, with February’s pending home sales activity falling by just over four percent year-over-year, NAR is adjusting their estimates for 2018 accordingly. The group is now calling for annual sales to be flat versus 2017, and for home prices to rise by 4.2 percent following a 5.8-percent increase in 2017.

Still, the 4.2 percent growth rate would imply that Americans continue to view owning a home as an important investment even with tax reform removing some of the benefits. The homeownership dream lives on.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at pduffy@metrointel.com or at 310-666-8288.

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