The Fate of Construction After Q2 2022

Construction

Builders Risk Outlook: The Fate of the Construction Industry After Q2 2022

Mid-year 2022, it’s not surprising that demand is the current key driver in the construction market.

But how is it being satisfied, who is being squeezed out, and what do predictions mean for builders and insurance agencies?

In this quarter’s Builders Risk Outlook, US Assure’s President Alan Ferguson answers these questions with findings from his leading sources.  

Influence of Housing Demand

As we continue to analyze the construction market and the impact on single-family housing, our focus remains on four key areas: housing demand, supply chain management, skilled labor and inflation. These factors not only impact the state of the housing market, but they also influence how the demand for housing will be satisfied.

Satisfying Demand

There are two elements influencing demand in today’s booming housing market. From a pricing and availability standpoint, there are simply more buyers than homes to be bought. The outcome has resulted in skyrocketing resale purchases at high price points, which explains why available homes have decreased rapidly over the last 12 months.

As for new construction, inflation is the primary driver. The Consumer Price Index (CPI), which measures the average change over time in prices paid by consumers for goods and services, reflects six to eight-point increases month-over-month. This CPI increase is attributed to the cost of building materials, hard goods and appliances that are driving the price point up.

As a result of high demand and inflation, many potential buyers are being squeezed out. Millennials in particular, which make up roughly 30% of new U.S. homebuyers, are struggling to compete in the market. However, the demand from these groups still exists, implying opportunity for the construction market and insurance professionals.

Impact on Builders 

Builders look to the Housing Market Index (HMI), a monthly survey of every single-family contractor in the country, for guidance. The index is based on how builders rate the following three areas over a six-month period:

  1. Current Sales Conditions
  2. Traffic of Existing Buyers
  3. Sales Expectations

 

NAHB/ Wells Fargo Housing Market Index

 

The current combined rating of these three factors is 77% , and anything over 50%  is considered positive.

The HMI measurement has slowly decreased over the recent months because increased interest rates and inflation have impacted the number of existing buyers. January 2022 modeled an interest rate of 3.45%, while June 2022 has experienced an inflation rate of 5.30%.

However, builders and contractors are still confident. Builders rated their current sales conditions at 85%, which is extremely positive. Over the next six months, this rating is expected to decline to about 73% – still a 10-point increase from March 2022.

Geographically, the Southern and Western United States expect to remain at a sales condition around 80%. This is backed by the large amount of recent migrations to these areas. The Northeast and Midwest are predicted to hover around 70%, bringing down the national average.

Single-Family Construction

US Assure remains bullish on the housing market for the foreseeable future. Statistics from the first four months of 2022 identified 1.7 million housing permits and 1.6 million housing starts.

New Residential Construction

 

The key indicator underlying those numbers is that single family permits and starts are over 1 million annually, which supports the conclusion that the single-family housing market is extremely strong.

As contractors continue to meet demand or find creative ways to satisfy the demand for housing, it’s an excellent opportunity for insurance agents to take advantage of construction in their area and help solve the needs of the contractors assisting with new home construction or remodeling.

Builders Risk Project Cheat Sheet

Uncover what project types are eligible for personal and commercial lines agents. You’ll find examples of the construction projects we’ve helped agents just like you insure with builders risk insurance.

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