Boom and Bust: Construction Employment and Apartment Prices

"It's going to be with us as a problem we'll be working through I think for several years. The idea is you've got to have enough capital, enough liquidity and a plan to take the losses that you're probably going to take. I am confident that we're doing the right things there. And I do believe it's a manageable problem.”

-Jerome Powell, Chair of the Federal Reserve

Hi Nuvo Community,

_{The construction sector and the housing market serve as critical indicators of economic health and consumer confidence. This article looks into the nuanced relationship between construction employment — a proxy for the construction sector's vitality — and apartment prices, through the lens of economic recessions. One might expect that there is naturally a correlation between the two variables. When apartment prices are historically high more builders decide to take on new projects, which in turn increases the number of construction jobs. When apartment prices are low, builders hold off on new projects because the cost to develop may be prohibitive based on the replacement costs of existing supply. Within multifamily, this dynamic has the unintended consequence of propagating boom and bust cycles, or periods of severe undersupply followed by severe oversupply. As most of our audience knows, many hot markets over the last decade are currently in the oversupply stage.}

_Methodology

_{Our analysis is based on quarterly data on the year-over-year percentage change in the number of construction employees in the US and the Apartment Price Index. Both variables are sourced directly from the Federal Reserve of St Louis. By plotting these time series data against observation dates and overlaying recession periods with vertical lines, we aimed to visually assess the relationship between construction employment, apartment prices, and economic recessions.}

 _{Construction Employment vs. Apartment Prices: A Time Series Analysis}

_{The time series graph reveals a moderate correlation (approximately 0.61) between the year-over-year percentage changes in construction employment and apartment prices, indicating that these two variables tend to move in the same direction to some extent. This finding suggests a relationship where the health of the construction sector is mirrored by trends in the housing market, particularly in apartment pricing.}

_{However, a closer examination during recession periods — notably around 2001, 2008, and the brief but sharp downturn in 2020 due to COVID-19 — uncovers a fascinating divergence. During these times, construction employment often experiences a decline, a response to reduced economic activity and investment. In contrast, apartment prices tend to be more resilient. Specifically, while the 2008 financial crisis led to widespread repercussions across the economy, including the housing market, the impact on apartment prices was not as directly correlated with the downturn in construction employment as one might expect. That trend has not held up in the current market cycle. In fact, apartment prices have plunged but the construction sector is holding up nicely. It will be interesting to see what impact prolonged interest rate levels will have on construction employment. We know that there are significantly fewer apartments planned for delivery after the current pipeline works its way through the system by the end of 2025 and early 2026. This implies that construction is slowing down significantly, and it may just take more time before the pause in new construction trickles down to construction jobs. It is important to note that construction in other sectors (e.g. industrial) are still holding up well, likely making up for some of the drop in new apartment construction.}

_{Diverging Paths During Recessions}

_{This divergence can be attributed to several factors. First, the housing market, particularly apartment prices, is influenced by a myriad of factors beyond construction activity, including interest rates, consumer confidence, urbanization trends, and rental demand. For instance, during economic recessions, while new construction might slow down, demand for existing housing, especially rental apartments, can remain stable or even increase due to shifts in consumer behavior or housing affordability issues. Moreover, government policies and intervention, such as stimulus packages or changes in interest rates, can cushion the housing market from the full brunt of a recession. The 2020 recession provides a stark example, where swift and significant government intervention in the economy and financial markets helped stabilize housing prices despite a downturn in construction employment. It seems the Fed may have overshot.}

_Conclusion

_{While construction employment and apartment prices are interconnected, their relationship is far from straightforward, especially in the face of economic recessions. If I were to project out the next five years, I’d expect these two lines to cross back over in late 2025, as apartment prices rebound and the recent slow down in construction results in fewer construction jobs and new deliveries. Translation, it’s a good time to buy if you have at least a five year time frame.}

Happy Real Estate!

All the best,

Yuri - Your Real Estate Investigator

Credit: Brian Underdahl, Chief Analytics Officer, Nuvo Capital Partners

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