“In 2013, residential construction continued the sustained improvement begun in 2012, credited to increased consumer confidence, lower inventory, attractive financing incentives for qualified buyers, and a general economic improvement,” said Jochen Duemler, CEO and head of Euler Hermes Americas Region.“Commercial construction industry recovery is also expected this year, but at a slower pace due to a high vacancy numbers and longer lead times required to complete new projects.”
While existing home sales have begun tracking at higher levels, recent mortgage interest rate increases have created volatility that may dampen the recovery pace. Sales surged once interest rates began to rise in May 2013 as “on the fence” buyers rushed purchases, motivated by fears that interest rates would continue to climb. As concerns over Fed tapering waned, both interest rates and existing homes purchase activity declined.
Conversely, new home sales dropped by 14.1% in July before recovering in August when purchasers adjusted to the new environment. As buyers continue to return to the market, the resulting decline in existing home inventories will likely drive 2014 demand in new home construction, positively impacting the macroeconomic recovery.
“The recovery to date has been biased toward existing home sales,” said Kim Fleischer, author of the report and construction sector analyst at Euler Hermes. “We believe that rising rates pulled forward hesitant buyers who were waiting for a bottoming of rates, and simultaneously discouraged buyers from entering contracts on new construction.”
U.S. commercial construction, which has experienced 8.5% annual declines over the past five years, is expected to rebound over the next five years. The recovery will be slower than that of residential construction due to high current commercial vacancy rates following overbuilding in 2005 and 2006. As consumer confidence grows, unemployment decreases and vacancies are filled, Euler Hermes expects the need for new construction to satisfy rising demand. However, this recovery will not be without its challenges as consumers continue their shift toward online shopping, suppressing demand in the important traditional brick-and-mortar niche.
Summarizing the key themes of the report, Fleischer said: “While our outlook for both the residential and commercial construction industries calls for sustained improvements through 2018, an economic downturn or a substantial rise in interest rates could imperil recovery and affect our conclusion.”