SubscribeThe nation's housing market witnessed monumental growth throughout 2003-05. However, this housing bubble was bound to burst as home price gains mounted and mortgage rates increased.
By the second and third quarters of 2006, the housing bubble began its inevitable deflation. In the second quarter of 2006, median home prices depreciated from a year earlier, for the first time in over a decade. Median home prices appreciated again in the fourth quarter of 2006, but housing starts decreased by a remarkable 21.2%. Correction in the housing market is expected to continue through 2007.
Residential construction has struggled as the nation's housing market cools. In 2006, the weakening of the housing market will take the largest toll on the construction of single-family houses. In 2007, only one state, Louisiana, and the District of Columbia, are expected to witness increases in real single family construction spending; the rest are expected to see declining growth, with 36 states seeing double-digit declines.
The market for single-family homes (although not the multiple-unit market) is in recession. Construction for multi-family homes in the United States posted positive gains throughout 2006, and is expected to continue to grow in the first few quarters of 2007. In comparison, single-family home construction in the nation began to slip in the second quarter of 2006, when it decreased 2.3% in current dollar terms. Real single-family home construction then saw a decline of 12.0% in the third quarter of 2006; double-digit drops are expected to continue into the middle of 2007.
Louisiana, Alabama, and Mississippi: In 2006, Louisiana, Alabama, and Mississippi were still recovering from Hurricane Katrina. As the states rebuilt, their spending on real residential construction significantly increased from pre-hurricane levels. In 2006, real residential construction is expected to have increased 22.5% in Mississippi, 15.5% in Louisiana, and 10.1% in Alabama. The majority of Mississippi's and Alabama's hurricane rebuilding occurred in the third quarter of 2006, when real residential construction increased 48.1% and 45.9%, respectively. Louisiana was a late bloomer; its recovery began slowly in the third and fourth quarters of 2006, and is expected to really gain speed in the first three quarters of 2007 when real residential construction growth will be in the triple digits.
By the end of 2006, Mississippi and Alabama had mostly recovered from the hurricane, yet Louisiana still had a long way to go. The hurricane hit Louisiana the hardest, and most of the state's rebuilding is expected to occur in 2007, as residential construction increases 137.44% in current dollar terms (in 2007, Mississippi and Alabama are expected to see decreases in residential construction).
Rhode Island: Despite the national real estate slowdown, building began for 4,122 new homes in Rhode Island in the second quarter of 2006, an increase of 54.4% from a year earlier. While housing starts declined in the third quarter of 2006 to 2,127, they are expected to have gone back up in the fourth quarter, increasing to a level of 3,629 -- an impressive 46.2% higher than a year earlier. Overall in 2006, Rhode Island's housing starts increased 33.9%.
Most of the health in Rhode Island's real estate market is coming from its multi-family sector. In fact, single-family housing starts were as low as 1,768 in the third quarter of 2006, the lowest level since the first quarter of 2003. While single-family housing starts sank by as much as 24.1% in the first quarter of 2006, multi-family housing starts have been steadily increasing since the fourth quarter of 2005. Multi-family housing starts had their most impressive growth in the second quarter of 2006, when multi-family housing starts increased 359.5% from a year earlier. Multi-family housing starts are expected to see even more impressive growth in the third quarter of 2007, when they will increase 365.5% from a year earlier.
Arkansas: The housing bubble did not hit Arkansas, but the slowdown is evident; the market in Arkansas did not flourish on the same scale as in other states in 2004 and 2005. In both years, the state saw modest gains of 3.0% and 8.1%, respectively, in real residential construction. However, compared to the double-digit growth seen in most other states, this growth was minimal, and the Arkansas housing market is still expected to decline in the years to come. Housing starts tumbled in the third quarter, down almost 19% from a year earlier, the second decline in 2006. Housing starts are expected to continue to moderate into the second quarter of 2007. In the fourth quarter of 2006, Arkansas home prices (a measure of the movement of existing single-family house prices) decelerated to 4.5% from a year earlier, the lowest growth in median home prices since the first quarter of 2004. A weak housing market in Arkansas will lead to decreases in real residential construction through 2009.
The Little Rock MSA is expected to have witnessed the greatest drop in housing starts in 2006 compared to all the other MSAs in Arkansas. In 2006, housing starts in Little Rock decreased 16.1%. In 2007, the Pine Bluff MSA is expected to see the greatest decline in housing starts, by 30.1%.
In 2007, total real residential construction is expected to decrease by the greatest amount in the Jonesboro MSA, where residential construction will fall 27.6% in current dollars. Every MSA in Arkansas is expected to experience declines in real residential construction in 2007. Real residential construction is expected to decrease in the Pine Bluff MSA all the way through 2011.
Arizona: Across the nation, the housing market is continuing to see a dramatic slowdown. Arizona is no exception, and, in fact, is seeing a more pronounced slowing due to an above-average increase during the boom years. The market currently has a large oversupply of housing that needs to be absorbed before there is a turnaround. In fact, housing starts are expected to have ended the year down 21.6% from 2005. Home prices are also seeing a slowing in appreciation rates from a year earlier, from a high of 41.1% in the fourth quarter of 2005 to an expected 6.6% in the third quarter of 2006.
This weak housing market has led to an estimated 7.7% decline in real residential construction in 2006, and is expected to lead to an even deeper 16.5% drop in 2007. In 2006, real residential construction is expected to have decreased the greatest in the Yuma MSA, where real residential construction fell 11.0%. In 2007, the Prescott MSA is expected to witness the greatest drop in real residential construction, decreasing 21.1%.
While residential construction is down as a whole in Arizona, multi-family residential construction is on the rise. There are several projects in the planning stages or under way for housing developments, condominium towers, and "condotels," which are hotels that also house condominiums. All these new projects have helped boost spending in the multi-family residential construction sector. In 2006, real multi-family construction spending in Arizona increased 57.3%, the largest gain this sector had seen since 1994. In 2006, real multi-family construction is expected to have been in the triple-digits in the Prescott and Tucson MSAs (both saw growth around 239%).
In 2007, the state will continue to see large expansions in the multi-family sector, but not at the same level as in 2006. In 2007, real multi-family construction spending is expected to increase 10.42%. However, in 2007, three of Arizona's MSAs are expected to see triple-digit growth. Real multi-family construction will increase 194.7% in the Yuma MSA, 172.1% in the Prescott MSA, and 112.8% in the Tucson MSA.
As construction concludes on all these new projects, real spending on multi-family construction will begin to wane in the state, increasing by a mere 0.9% in 2008 and continuing with single-digit growth through 2011.
The majority of the activity in the multi-family residential construction sector is taking place in the Phoenix MSA, which accounted for 87% of total state multi-family construction in 2006. Multi-family residential construction spending in the Phoenix MSA increased 48.6% in 2006, the largest gain since 1995. Multi-family construction spending will begin to taper off in 2007, with an increase of only 3.5%, and will continue to see single-digit growth through 2011, with even a small decrease of 0.4% in 2008.
Idaho: The rapid influx of migrants to Idaho in recent years, coupled with low interest rates, has driven a housing boom and a surge in construction jobs in 2004 and 2005. Conditions are ripe for a turnaround, however, as housing starts fell every quarter in 2006 and are expected to have fallen to an annualized rate of 13,677 in the third quarter of 2006, a 27.6% drop from a year earlier. As construction projects wrap up, the construction industry is expected to see an employment contraction. Real residential construction is expected to have decreased 9.5% in 2006, and by another 10.6% in 2007.
In 2006, declines in real residential construction in Idaho are expected to have been led by the Lewiston MSA, with a 34.5% decline. In 2007, the Idaho Falls MSA is anticipated to show the greatest decline in real residential construction growth, with a 29.6% decrease.
This article was extracted from Global Insight's U.S. Construction -- State and Metro Area Focus. For a free sample of this service, please visit www.globalinsight.com/Construction.