The second quarter 2019 edition of the NAHB Home Building Geography Index (HBGI) introduces a new analysis of residential construction in manufacturing-intensive areas, in addition to updating trends for previously-defined areas of the exurbs, suburbs and rural markets.
The HBGI data find that manufacturing areas experienced above-trend growth for single-family construction in 2017, followed by declines in 2019 as the overall manufacturing sector softened. The HBGI also finds similar performance for apartment construction in these markets.
To gauge the economic health of the manufacturing sector, we turn to the Institute for Supply Management (ISM) Production index, which accounts for 18 manufacturing industries.1 The ISM Production index ranges from 0 to 100, with values above 50 indicating growth. While the ISM Production index registered at 54.1 in June 2019, a sign of slight expansion for the manufacturing sector, it has been trending downwards since its recent peak in December 2017 (65.2). It is worth noting however that manufacturing employment has continued to grow during this period, usually a sign of rising housing demand.
Additionally, IHS Markit’s Flash Purchasing Managers’ Index’s preliminary figure for the month of August was calculated at 49.9, down from 50.4 in July and below the neutral 50.0 threshold for the first time since September 2009. These data show that the manufacturing sector contracted for the first time in nearly a decade.
The combination of ongoing housing affordability challenges and a softening manufacturing sector have led to weakening and declines of home construction activity in manufacturing-intensive areas in 2019. The HBGI defines such areas as counties for which the local manufacturing employment’s share of total employment was in the top 25% of all counties in the U.S., based on 2016 5-year American Community Survey data. These counties are marked in red on the following map.
Ten percent of single-family construction has occurred in these manufacturing-intensive counties, with just under seven percent of multifamily residential construction, as of the end of the second quarter of 2019. When single- and multifamily permits are combined, homebuilding in manufacturing counties has ranged between 8% and 10% of total homebuilding activity in recent years. The shares of single- and multifamily construction in these areas have been roughly constant over the last 8 years.
For 2016 and 2017, when the ISM Production Index was increasing, single-family construction growth rates in manufacturing areas were outpacing the rest of the nation. During this period, single-family construction was averaging an 11.7% annual growth rate in manufacturing areas, compared to less than nine percent growth for the rest of the U.S.
A clear weakening was evident at the end of 2018. For the fourth quarter, the four-quarter average growth rate of single-family construction in manufacturing counties was only 0.5%, compared to 4.8% for the rest of the country. This growth rate then turned negative at the start of 2019. The second quarter data indicates a 3.8% four-quarter decline for manufacturing areas single-family construction, comparted to a 1.6% decline for the rest of the U.S.
In manufacturing counties, apartment construction was declining at the start of 2016. However, with gains for manufacturing activity, apartment construction in manufacturing areas accelerated in the second quarter of 2017, reaching a four-quarter average expansion rate of 20.6% for the first quarter of 2018. However, following this quarter, apartment construction in manufacturing counties slowed over the remainder of the year. For the second quarter of 2019, the four-quarter growth rate of apartment construction in manufacturing counties was -4.1%, compared to a 0.4% gain for the rest of the nation.
The recent trends of the HBGI data for manufacturing areas thus reflect the current cycle of manufacturing activity, with slowing global growth and recent concerns over trade issues. Home construction activity in manufacturing-intensive local markets was outpacing the rest of the nation in recent years, only to slow and turn negative in 2019.
Additional information from the HBGI is available for different market sizes and geographic regions.