Residential construction starts fell 21% in January 2023 compared to the same month in 2022. The dip is concerning, but similar downturns have happened in recent years. What does this slip mean for the industry and commercial builds, and what should companies know going into the second quarter of 2023?
Data from the U.S. Census Bureau and the Department of Housing and Urban Development (HUD) show declining construction starts in the first couple of months of 2023. It offers some interesting insights into the state of the industry.
As of mid-February 2023, housing starts were down 4.5% compared to December averages and 21.4% lower than in January 2022, according to the Census Bureau and HUD. Building permit authorizations also fell 27.3% compared to January 2022. However, housing completions were higher than December averages and January 2022 completions.
A February 2023 report from Dodge Construction Network found a similar downturn, with residential construction starts down 20% compared to January 2022 and overall construction starts down 27%.
This data indicates that the surge in construction starts due to the housing boom may be coming to an end. New residential construction data from the past few years shows a sharp decline in starts in early 2020, which aligns with the initial onset of the COVID-19 pandemic. Starts rose again and surged well above prepandemic levels in the second half of 2020 through the first half of 2023.
Construction starts are falling again, but this should not necessarily alarm electrical contractors. The current rate of housing starts is down compared to 2022, but it is on par with prepandemic levels. This may simply be a return to the status quo. However, it is worth examining the factors that could influence the construction slip starting at the beginning of 2023.
Many elements contribute to the slowdown in construction starts, including supply chain challenges and homebuyer concerns. The housing boom of the last couple of years increased investment and activity in the residential construction industry. However, it has been on a downward trend for a few months now.
The third quarter of 2022 saw rising mortgage rates and fewer houses going on the market. Many prospective buyers are concerned about an economic recession, which may reduce the number of buyers and sellers. As a result, interest in new home construction was already declining going into 2023. This slowdown may mean less investment, demand for new construction starts or a combination of factors.
Construction companies also face financial difficulties that could influence the drop in new project starts. An important part of the building process is determining budget estimates in the preconstruction phase. However, prices for key materials and staffing costs continue to fluctuate.
The construction industry has been grappling with a persistent labor shortage for years. As a result, companies often have difficulty finding enough employees for a project or with specialized skills. At the same time, supply chain issues such as shortages and tariffs can make prices for certain materials volatile. These factors complicate budgeting in the preconstruction phase and makes it challenging to begin projects.
While a 21% dip in construction starts may sound concerning, the market has seen this kind of fluctuation before. For example, multifamily housing starts fell 26% in February 2018 after surging in 2017. Part of these sharp peaks and dips is due to the natural volatility of the industry. However, other factors have impacted things in the past.
For instance, in 2018, industry experts reported having difficulties with tariffs on steel and aluminum. Price surges in these key materials made some projects challenging to budget or even greenlight. Similar factors are still at play with current supply chain challenges.
Inflation and economic uncertainty have also played important roles in the construction industry in previous years. They factored into dips in construction starts in 2018 and 2020. For instance, the onset of the COVID-19 pandemic in 2020 created sudden and drastic economic concerns, triggering the sharp decline in U.S. Census Bureau data. Current worries about a recession are similarly causing a decrease in new housing starts.