Mid-Year Economic Indicators & How To Stay Ahead of Shifts in Construction

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What does the future of the home construction economy hold? Todd Tomalak, principal at John Burns Real Estate Consulting Group, joins us again for a great episode. He’s got tons of data and a positive outlook on today’s construction industry, along with ideas around what manufacturers and building professionals can expect for this year and the years ahead.

Todd Tomalak and the team at John Burns Real Estate Consulting Group keep a close (almost obsessive) eye on home construction, and he has some important updates on our industry in the near future.

And that future looks bright, according to Todd.

He gave us a few very optimistic data points around home construction projects. “We're very positive on housing and, just to give you a sense, we're thinking around 17% growth in single-family starts this year,” he said. Multifamily construction should see a growth of 3% according to the Consulting Group’s research.

“On home improvement, I can tell you for major tear-out remodels, we could hit 40 to 50% cumulative growth between now and 2024, 2025,” he says. “Lots of good things going on.”

New home construction projects dipped earlier this year, which has had a lot of industry journalists wondering if lumber prices and supply chain issues are causing builders to hold off on construction. But Todd thinks there’s a different narrative.

“That's not what's going on. At least we don't think so. So here’s what we know. So we survey about 20 to 25% of all new homes sold every month,” he says. “Now, April admittedly, we're comping versus COVID — but April sales from the big production builders were up 91%.”

In fact, sales were up 60 to 70% for the last six months, according to Todd, who says that there’s a backlog of business. “It’s just that the builders have nothing to sell,” says Todd. Those builders have sold a lot of their land, which is why the numbers seem “wonky” right now.

“I think we're in a soft spot right now where they've sold out of everything that they have from a community standpoint, they're tripling down on land investment, but it takes time for those communities to show up,” explains Todd. “Lumber is important. That's not what was behind the spring decline, though.”

So when will we start to come out of that soft spot he mentions?

He thinks it could be sooner than we think. “I think we're looking at the alleyway of when things begin to increase between now and then, and there's some shifts that are happening in the type of communities that are being built.”

These communities are on the outside of major cities, and they’re larger, with a higher density, which means building as many as “four and a half homes per month per community,” he says.

That means more demand for building products and labor, and Todd believes that shift could happen before 2022. “We could actually see another squeeze by the end of the year, if that piece of construction velocity were to happen, just because it's going to be another issue of accelerating starts,” says Todd.

We've talked a lot on the podcast about how expensive homes have gotten. We asked Todd about whether or not he expects a breaking point when it comes to affordability and home sales in the coming months.

“So we have a graph in our report that compares our pricing forecast to every other forecast … but we should be thinking double-digit home price appreciate,” says Todd. “Consensus in Wall Street, if you go to the Journal, pull together what consensus forecast is for home price appreciation is 3.5%.”

Home prices are going up, and that’s not all: “We have mortgage rates creeping up towards 4% by 2024 … If we look at individual markets where things have become permanently more expensive — the Bay area, there's a lot of other markets, kind of the secondary, tertiary markets that could go up pretty significantly,” he says.

If you’re balking at those predictions, you’re not alone. “I just think this is an issue that people are still digesting what's really happening already. The pace of it is going to slow down in future years, just because it can't grow double-digit pieces for infinity,” says Todd.

So we asked Todd what might throw a wrench in those increases — and some of that is up to the mortgage industry. While there’s inflation right now, mortgage rates aren’t incredibly high at this point.

But Todd explains a few scenarios that might cause an upset. If those rates are significantly increased, say, 50 to 75 basis points more, the impact to affordability “would be about the same impact that happened in the 70s. As when we saw inflation going on, home prices led the charge there. And then the Fed cranked rates up,” he explains. “So we're not seeing that right now, but that's one of the things we're watching, for sure.”

Then there’s revenge spending, where “people are going to want to go to Disney and they can't wait to go eat out,” says Todd. Homeowners and potential homebuyers want to go on vacation and spend in other ways — not just on their homes. Which could impact the construction market in a negative way, as well.

“But that's basically focused on the smaller minor update projects,” Todd says. Larger, more substantial renovations are expected to be strong in the next few years, however.

For manufacturers, the best thing you can do when it comes to selling your products is planning ahead and paying attention to customer demand. “If I was a manufacturer, I'd be spending 70% of my time thinking about the next year ahead. Those homes that I mentioned that are going to be built in these newer communities have very different product usage than the homes that were built in 2019 and 2020,” comments Todd.

Homeowners are going to look for more ways to be outdoors, for instance, especially after the pandemic forced a lot of us outside. Outdoor patios, decks, and outside entertainment and dining spaces are incredibly on-trend right now. “So getting arms around kind of just what those shifts are going to be is going to be really important. On the home improvement side, I don't see manufacturers do this enough,” says Todd.

Venveo has seen how many DIYers and pros are shopping for new products and using new brands in their projects, which has been disruptive for some manufacturers and their selling strategy.

“We think we're kind of just getting started down that path,” says Todd. “And I think that will get much more competitive.”

Todd also points out that the supply issues we’ve experienced in building materials will smooth out. “18 months from now, 24 months from now, even if prices are high, it will be easier to get products,” says Todd. “And, candidly, there's a lot of structural shifts that are happening within housing that, if you're too focused on just your product category, it could cause all sorts of problems.”

More homeowners are going to expect sustainable, energy-efficient products, and manufacturers will also need to consider that kind of growing demand. “There's different products and relationships that are in that spider web that you didn't have to think about before, if you just sold like an HVAC system, that you might care about five years from now, if you're investing in this major other part of your home. So I think it's going to get a lot more interesting once we're through this supply chain nightmare, and that's no longer the narrative,” says Todd.

Building products customers are also going to want more options for buying products. Ecommerce and customer service are going to be crucial for building materials manufacturers. Even if your product has traditionally been sold from a showroom, that kind of sales experience is changing for the consumer, across all industries.

“Have you seen the percentages of how many whole homes are being bought sight unseen, entire house?” says Todd. “It's a matter of packaging. If we're willing to buy a $100,000 car or a $300,000 home sight unseen, we will also do it online if you provide the right framework to do it.”

For manufacturers, that means streamlining the sales experience for customers online. Make it easy to buy your products, provide plenty of product documentation and installation guides, and feature your customer reviews. That’s what they’re seeing in other eCommerce experiences, after all.

As Venveo’s Beth Pop-Nikolov points out: “The person who gets the closest to the customer wins.”

There are a few other significant shifts in the months ahead that manufacturers and other construction professionals can expect to see. Todd discussed these with us at more length on the podcast, but here are the highlights:

• DIY isn’t dead yet: “We think pro remodeling is going to continue to grow hand over fist, but people are going to do a hybrid project where it's a pro remodel, but they will do a DIY for a portion of the project because it's so expensive and so difficult to get the project done,” says Todd.

• Expect more home improvement spending on rentals: “We're seeing all this institutional capital come in to force single-family rental properties that they're planning on owning for a number of decades. There's several layers to where that leads. More home improvement spending, but also because if you believe that a thin inventory of homes will drive more home price appreciation, well, that group buys units of the inventory and doesn't have to relist any other unit,” explains Todd.

• Todd foresees more types of rental remodels, in general. “We heard the CEO of Invitation Homes (they own 80,000 homes) basically plead with us to say, ‘Please, manufacturers, help us figure out a way every seven years, every eight years, how do we update the cabinets, the fence, the countertop? Because this is a six-figure resident in terms of the amount of income that they have. They don't have to rent, they're choosing to rent and we want to make sure that we can continue to grow.’” says Todd.

As we finish out the rest of the year, it’s important to stay on top of trends in home construction. While we can’t predict the future of the industry perfectly, we can be certain that it will be exciting.

Listen to the full interview with Todd Tomalak for deeper insights and valuable perspectives on home construction.

You can reach out to Todd on LinkedIn or connect with him via email at ttomalak@realestateconsulting.com.

Looking for more industry data and some perspective on the rapidly changing industry we’re experiencing right now? Subscribe to our podcast and stay on top of it all.