Despite a challenging economy, experts offer a cautiously optimistic outlook for the residential construction and real estate industries
The biggest investment you’ll make in your life—that’s how most homeowners think of real estate. And for the average person, it’s an accurate description. But in an ever-surprising economy fraught with increasing interest rates, the possibility of inflation, supply chain disruptions, labor shortages, and many other challenges, this big investment becomes an even bigger challenge than it normally has been. Buyers looking to invest in a brand-new construction or build their dream home, or homeowners who want to boost their property’s value with a renovation or addition, have more to consider than they did even as recently as one year ago.
In short, new home construction is going through a period of dramatic change. But insight from local economic experts, along with professionals in the home building industry, see reason to be cautiously optimistic.
At the time of this writing (mid-January), the national economy was (is) teetering between rebound and recession. Several indicators—decreased consumer spending, a robust job market, declining home sales, and easing inflation—seem conflicting and are giving the Federal Reserve fits in deducing its approach to 2023 policy to combat recession.
On industry frontlines, however, the reality is that challenges—many brought about by the Covid pandemic—still exist. In the world of residential construction and real estate, financing and ownership became more difficult within the past year, and that has translated to less homes being built. “The average 30-year fixed mortgage rate has increased from 3.22 percent at the start of 2022 to well above 6 percent at the start of 2023,” says Zachary Fritz, COO of Sage Policy Group in Baltimore, the renowned economic advisory firm. “That’s had a severe impact on home buying activity, which is beginning to have a negative effect on residential construction activity.” He adds that authorizations for new residential construction peaked in December 2021 but are down 28.7 percent and now back to pre-pandemic levels. “The same is true of housing starts [a housing start is counted as soon as groundbreaking begins, and each unit in a multi-family housing project is treated as a separate housing start], which are down 20.9 percent from the April 2021 peak,” he says.
New construction could remain stalled until the economy fully rebounds. Jason R. Pearce, AIA, CDT, LEED AP, senior associate and architect with Becker Morgan Group Inc., says he doesn’t want to predict a recession for 2023, “But the fear of one certainly exists and continues to loom over anyone in the construction business,” as he puts it. Fewer people are buying and building single-family real estate because interest rates are high, but he sees the multifamily residential sector remaining strong. “If we do enter a recession this year, it will be more problematic for housing in 2024 and 2025,” he says. “We were fortunate enough to still experience a ‘post-pandemic’ surge in housing, but this has resulted in an overstock of completed homes in comparison to new projects,” he says. “This along with rising interest and inflation most likely translates to less housing starts.”
Fritz agrees and expects these dynamics to remain in place in the early part of 2023. But he believes circumstances could get better later in the year, when supply chains normalize, and demand starts to rise.
On the other hand, some homeowners are finally getting around to realizing their renovation and construction dreams, according to Melanie Hartwig-Davis, principal and CEO of HD Squared Architects. “People are still coming forward with projects they’ve been putting off for years,” she says. “One of the things I always tell clients is it gets worse before it gets better.”
It’s hard to say exactly how many people are opting to renovate their existing homes as an alternative to buying a new home. Fritz points out that higher borrowing costs likely mean many current homeowners are choosing, instead of buying new, to renovate the home they’re currently in. However, the assertion isn’t exact because most construction data doesn’t distinguish new home construction from renovation projects.
And because the economy is ever-changing and adjusting, the construction and housing markets correspondingly contract or expand. Most Americans are aware of supply chain disruptions and labor shortages, which make project scheduling and exact cost estimates more difficult. This means everyone involved in the process—including the homeowners themselves—have had to be adaptable and open-minded, according to Hartwig-Davis, who explains that availability from suppliers can often affect the way the initial design is carried out.
“We have all had to be much more flexible and deal with longer construction times,” she says. “Contractors don’t know when they’re going to get X, Y, and Z. We’ve had families who have had to move into their homes without, say, kitchen cabinets.”
One of the big challenges this year, as far as supply goes, will be cement and concrete, according to Pearce, whereas last year’s shortages were in lumber, plywood, and steel. “The price increase for raw material and transportation continue to drive up material costs and lead times continue to present challenges for contractors,” he explains.
Aside from these challenges, home design and functional trends in 2023 will continue to evolve for the better. Today’s homes look very different from how they were even as recently as five years ago. More homeowners are interested in smart technology—and they’re willing to invest in it. They want lights, appliances, HVAC systems, home safety systems, and other aspects of their home to be sync-able and accessible from apps on their devices.
Today’s homeowners also have a different approach to space than they did in the recent past. Open floor plans are becoming less trendy as people favor separate spaces, something families realized they needed during the pandemic when many adults were setting up remote offices and children were doing virtual school. “Also, we’ve seen an increase in home gyms and theaters,” Hartwig-Davis highlights. “And there’s certainly been an increase in screened porches, pools, and amenities for people to escape the day-to-day stresses of the pandemic and all that it’s brought.”
She also notes that people are thinking in terms of safety as climate change brings more extreme weather every year. People want their homes to have a place where they can shelter from a tornado or hurricane if the need arises, for example.
Furthermore, people want their homes to be eco-friendlier and more efficient. Hartwig-Davis has seen increased interest in electric over natural gas, a fossil fuel, as well as the removal of oil tanks, commonly seen in older homes. “It’s become more known that heat pumps are a better choice for air quality, efficiency, and, overall, for the environment,” Hartwig-Davis says.
So, for those planning to buy or sell a home in 2023, what should they expect? Fritz says the beginning of the year is likely to continue having low inventory levels, high prices, and lofty borrowing costs. “That may very well change by the latter parts of the year, as borrowing costs may subside and inventory levels are likely to improve,” he says. Sellers can still expect to gain healthy returns on their property investments, though they may not approach the astronomical highs from a couple years ago.
And if somebody is set on building a new home, or having their current home undergo construction? Pearce suggests homeowners can expect premium costs for material and construction, and potentially long lead times. The good news is that, by now, many contractors and homeowners have learned to buy and store materials in advance to alleviate worry over potential cost hikes. “Until we see both inflation and COVID-19 under control, the housing industry will continue to experience swings in lead times and construction costs,” Pearce says.
No single person can say for certain what’s going to happen in 2023. But no matter what happens, whether circumstances improve or continue to present challenges, many experts agree that consumers have a lot to consider when it comes to their biggest investment—their home—and whether they want to buy, sell, build, or renovate.
