Is Construction Really Going Down? Or not?

In the realm of construction and home building, there’s a sea of information, and it’s easy to get lost in the waves of headlines and statistics. Lately, there’s been talk of a significant downturn in building permits and a potential crash in the home building market. However, let’s not rush to conclusions. In this post, we’ll dissect the data and examine whether the numbers truly support the narrative of a home building crisis.

Analyzing the Headlines: California Building Permits Drop 29%

One headline making waves is from the Orange County Register, stating that California building permits dropped by 29% as home buying and rents cooled. October, they say, was the seventh slowest month for permitting since 2015. On the surface, it sounds alarming, but let’s dive deeper into the numbers and see what they really reveal.

Putting Numbers into Perspective: A Closer Look at October Stats

Yes, October 2022 marked the seventh slowest month for permits since 2015. But before we hit the panic button, consider this: In October 2018, a comparable year, there were 7,000 home permits issued. Fast forward to 2022, and the number is nearly identical at 7,168. Is it really fair to label this as a crash? Seasonal variations and economic factors play a role, and a nuanced interpretation is essential.

Understanding the Seasonality of Construction

To grasp the full picture, it’s crucial to understand the seasonality of construction. Looking back to 2018, one of the most robust years for construction, we see that October had a typical number of permits. However, just a few months later, in December, the permits surged to 10,000, emphasizing the cyclical nature of the industry. Declaring a crash based on a single month might be premature.

Demand and Affordability: The Driving Forces

Building permits are closely tied to demand and affordability. While it’s true that interest rates and home prices are on the rise, the demand for new housing units persists. With an estimated 5 million more people in the country than there are houses, the need for housing is evident. The challenge lies in aligning the price point with affordability.

Builders’ Dilemma: Speculative Home Building vs. Real Demand

In the face of uncertainty, many builders may be steering away from speculative home building. The concern revolves around whether potential buyers can afford mortgages in the coming years. Spec homes might see a decline, but building for specific buyers or tackling remodels could be the lifeline keeping builders afloat.

Rising Costs and Demand Destruction: Balancing Act for Builders

While lumber prices have slightly eased from their highs, they remain above 2018 levels. Builders are grappling with increased costs, demand destruction due to higher mortgage rates, and a potential decline in remodel funding. It’s a delicate balancing act for builders, who must navigate these challenges while maintaining their fixed overheads.

Looking Ahead: The Long-Term Implications

The real question lies in the long-term impact. If the current trend continues, the housing demand in 2025 or 2026 could be at risk. Fewer homes built now could mean more homelessness or an increase in rent-disadvantaged residents in the future. It’s essential to consider the broader implications beyond the immediate dip in building permits.

A Nuanced Perspective on Building Permits

While the headlines may suggest a home building crisis, a nuanced examination of the data paints a different picture. Understanding the seasonal nature of construction, the ongoing demand for housing, and the challenges faced by builders provides a more balanced perspective. As we navigate these uncertain times, it’s crucial to base our assessments on a thorough analysis of the numbers rather than succumbing to sensationalized headlines.

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