Is Construction Really Going Down? Or not?

  • 3 min read

In the realm of building permits and construction, a wave of information and data often creates an atmosphere of uncertainty. Misinformation abounds, and headlines can sometimes paint a picture of a significant downturn in home building. Let’s dive into the numbers and explore what they genuinely signify. Using an article from the Orange County Register as an example, which asserts a 29% drop in California building permits, we’ll dissect the data and separate fact from sensationalism.

Analyzing the Headlines: Is Home Building Really Crashing?

The article highlights that October witnessed the seventh slowest month for permitting since 2015, hinting at a potential crisis in home building. However, a closer inspection of the numbers reveals a more nuanced narrative. In 2018, a year chosen for comparison, the slowest month for permits was typically around October, with figures hovering around 7,000 permits. Fast forward to 2022, and the numbers are relatively consistent, with 7,168 permits, marking a seven-year low but not necessarily an alarming crash.

Seasonal Variations and Historical Context

Examining the historical context, 2018 was a robust year for construction, witnessing fluctuations in permit numbers throughout the seasons. October’s dip was not an anomaly; in fact, it was part of a seasonal pattern. Even with a 29% pullback, the current permit issuance remains higher than in previous years. Hence, labeling it as a crash requires a nuanced perspective.

Understanding Demand and Affordability

Building permit issuance is intricately tied to demand and affordability. While the current economic landscape may witness a slight pullback due to increased home prices and interest rates, the fundamental need for new housing units remains. The crucial question revolves around affordability—can people buy these homes?

The answer lies in acknowledging the estimated 5 million more people in the country than there are houses. This underscores a continued demand for housing, albeit with challenges related to aligning prices with affordability. It’s essential to recognize that demand for housing persists, whether in the form of new construction, reconstruction, or remodeling.

Builders’ Dilemma: Speculative Building vs. Affordability

Speculative home building, characterized by constructing homes without a committed buyer, might experience a decline as uncertainty looms over future affordability. Builders may shift towards more targeted projects—building for specific buyers or taking on remodels to sustain their operations. The fixed overhead costs, including equipment, insurance, and employee salaries, necessitate ongoing deals, even with narrower profit margins.

The Cost Conundrum: Balancing Margins and Overhead

Builders grapple with rising costs, even as lumber prices have somewhat receded from their peaks. The dilemma intensifies when potential buyers face challenges in securing loans at higher mortgage rates. Remodeling budgets are also affected, as homeowners may be deterred by elevated interest rates.

Looking Ahead: Building Today for Tomorrow’s Housing Needs

While permit percentages may show a decline, the critical consideration is the overall number of new homes constructed year over year. A significant reduction in construction now could impact housing demand in the years to come. The challenge lies in finding a balance—meeting today’s economic constraints while ensuring housing availability for future generations.

Navigating the landscape of building permits and construction requires a discerning eye. Rather than succumbing to alarmist headlines, understanding the nuances of seasonal variations, historical trends, and the persistent need for housing provides a more accurate perspective. As we grapple with economic shifts, the key is to build not just for the present but with a foresight that addresses the evolving housing needs of the future.

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