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Is an Increase in Residential Construction on the Way?

The U.S. labor market added 200,000 jobs and unemployment remained flat at 4.1 percent in January 2018 according to data released by the U.S. Department of Labor on Friday. The sectors adding most jobs during the month included construction, food and drink services, health care, and manufacturing. Average hourly earnings rose 2.9 percent year over year.

“The increase in labor supply is encouraging, supporting our view that there remains an untapped reservoir of workers that could be drawn into the workforce as wage gains pick up amid rising demand for labor,” said Doug Duncan, Chief Economist at Fannie Mae.

The housing market saw a silver lining to its problem of low supply as the construction industry added jobs at a rapid pace in January 2018. According to Labor Department data the construction sector added 36,000 jobs in January with more than 26,000 of these jobs being added for specialty trade contractors. For the full year, construction added 226,000 jobs.

“More construction is on the way. Residential construction jobs had another good month and are the highest since 2008 as builders work to add supply given the tight inventory and rising home prices,” said Tendayi Kapfidze, Chief Economist at LendingTree. “The labor market remains tight, but the housing market is more so and home prices are still outpacing wages significantly.”

“While residential construction jobs increased  by 5,000 from their December 2017 figures, they were only 1.3 percent above the level a year ago,” said Mark Fleming, Chief Economist at First American. “The ability to build more homes is strongly related to the size of the construction labor force. It’s hard to build homes without home builders. In fact, given today’s news, it’s reasonable to expect the number of housing starts in January to grow by only 1 percent compared with a year ago.”

The growth in wages is also driving concerns about inflation and a spike in yields as well as further hikes in rates by the Federal Reserve. “The big news was a solid increase in wage growth to 2.9 percent, which is the high-water mark for the recovery. This provides even more ammunition for the Fed to raise rates next month," said Curt Long, Chief Economist at National Association of Federally-Insured Credit Unions (NAFCU).

“The 10 year treasury spiked on the news and rates jumped to 2.83 percent from 2.78 percent immediately following the release of labor data. This is the more relevant rate for the housing market and will place upward pressure on mortgage rates,” Kapfidze said.

However, supply still remains the key issue for the growth of the housing market. “Solid gains in residential construction employment growth over the past several months should lead to supply growth; however, supply will likely still trail demand growth, boosted by rising disposable household income,” Duncan said.

About Author: Radhika Ojha

Radhika Ojha, Online Editor at the Five Star Institute, is a graduate of the University of Pune, India, where she received her B.A. in Commerce with a concentration in Accounting and Marketing and an M.A. in Mass Communication. Upon completion of her master’s degree, Ojha worked at a national English daily publication in India (The Indian Express) where she was a staff writer in the cultural and arts features section. Ojha also worked as Principal Correspondent at HT Media Ltd and at Honeywell as an executive in corporate communications. She and her husband currently reside in Dallas, Texas. You can contact her at Radhika.Ojha@theMReport.com.
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