Is the Residential Construction Industry Expected to Grow in the Current Economy?

Published February 17, 2023

Construction continues to endure setbacks from the global financial crisis. Fears that still reside from the Great Recession that occurred from 2007 to 2009 are causing many construction companies to tread carefully as the economy risks repeating that same pattern. So will construction come to a halt in the current economy?

Well, the good news is that the 2007 housing crisis taught construction companies a few lessons that they can carry over to this current event. Risk mitigation is key to overcoming these moments because while the risk is much higher than normal, there are also far more opportunities for massive profits.

Construction Industry during the Pandemic

The pandemic was the catalyst for the current state of the economy, so the changes in the construction industry can be traced back to this moment. When people were quarantined, household wealth declined to recessionary levels. However, actions were taken that turned this around quite quickly. Federal stimulus, stock market recovery, and better spending habits all helped household wealth rise to shockingly high levels.

While all of that was happening, housing became more affordable due to the declined federal funds rate that was designed to help stimulate the economy. Americans ended up with more money to invest so they took it to the housing market. Then we saw sales pick up momentum and demand surged. Inventory levels were too low, which motivated construction companies to build more houses to meet that demand. Housing inventory dropped and prices soared.

Challenges Faced by the Construction Industry

The construction industry also finds itself in the midst of a crisis that’s plaguing every industry. A fragile supply chain combined with labor shortage has driven up the price of materials. At one point, we saw the cost of lumber skyrocket a whopping 264%.

Rising material cost is not the only challenge. Product lead times are about three times higher than they were before the pandemic. For instance, electrical distributors have documented lead times of over a year for installation of transformers. Hydraulic cylinder manufacturers are experiencing many backorder situations.  Without these cylinders, construction machinery can’t perform. Longer lead times contribute to long delays and sometimes even cancelations. This isn’t expected to improve in the coming year, so it’s a challenge that construction companies will continue to face.

Another setback is inflation. The rapid increase in property prices has closed the door to many people since they can’t afford those prices. As a result, we saw the Federal Reserve raise the federal fund rate four times in 2022 in an effort to offset this issue. This rapid rising price is compounded by the simultaneous rise of mortgage rates. Many aspiring home buyers have been shoved into rental markets.

Out of all these issues though, supply continues to be the greatest challenge faced by construction companies.

The Future of the Construction Industry

The economy is experiencing a shift, and will bring in a new era where we see a much different landscape. Even though there’s a demand for housing, it doesn’t look as if the new era of construction will be able to keep up. Builders are being extremely cautious so they don’t fall prey to the same devastation as experienced in the 2007-2009 economic crisis. While this is a smart business approach, it also causes production to be slower. Simply put, construction companies are not willing to over-leverage and risk their entire business to meet this demand. And who can blame them?

Throughout 2023, the construction industry will continue to be heavily influenced by the supply chain. To meet this challenge, construction companies will need to be more efficient. This means investing in technology to make certain processes less strenuous. By facing these challenges head-on, construction companies will likely be able to weather the current economy and come out stronger than ever!