Building Cycle

Weather

In many parts of the country, excavating, digging, and pouring foundations are not possible during winter months. As a result, housing starts are systematically low in winter and spring and systematically higher in summer and fall. Because these predictable seasonal fluctuations are uninteresting and can hide relevant changes, housing starts are usually seasonally adjusted. Seasonal adjustment eliminates predictable repetitive swings, making interpretation of the rest of the time series easier. Other types of adjustments include corrections for holidays, leap years, and so on.

Business Cycles

Modern economies experience swings in economic output. During economic expansions, unemployment falls, gross domestic product (GDP) growth is strong, employment rises, and the rate of inflation tends to increase. During these periods, housing starts almost always increase, sometimes quite dramatically. During recessionary periods, employment falls, GDP shrinks, unemployment rises, prices either increase slightly or decline altogether, and housing starts fall, sometimes quite sharply.

The phrases “business cycle” and “building cycle” are misnomers, as they imply that there is a repetitive process at work and that at regular intervals we swing from expansion to recession and back. This is not the case. Since World War II, recessions have been as short as 6 months and as long as 18 months, with the average being 11 months. Similarly, post–World War II expansions have been as short as 12 months and as long as 120 months. This same temporal irregularity applies to building cycles as well.

In the early phase of an expansion, residential construction can be quite profitable. This is partly due to pent-up demand created during the recession because of reduced household formations. In addition, economic expansions are usually accompanied by declining interest rates. As residential construction activity is very interest sensitive from both the supply side (the builder) and the demand side (the buyer), the combination of low rates and pent-up demand usually results in rapid construction growth. [Page 46]However, the land development process often takes years to complete. As a result, it is not uncommon for some developers and builders to commence a project during a boom only to find that the economy is in a recession when the houses are ready to be sold.

Single Family versus Multifamily

Lead times for single-family construction projects are generally shorter than for multifamily projects. Although a single-family house can be built in less than a year, lining up financing, assembling a parcel to build on, and acquiring all the necessary permits to build a large multifamily building can easily take years. As a result, the impact of expansions and contractions on these two market segments can be quite different, with some single-family permit and start data suffering relative to the multifamily sector, and vice versa.

Fiscal Policy: Expenditures on Public Housing

During the recession that lasted from November 1973 through March 1975, single-family activity fell by 21%, while multifamily plummeted by 70%. While the decline in multifamily activity was partly caused by the recession, it was primarily caused by a large reduction in public housing construction. A major reason for the eventual decline was that public housing programs became controversial. In many cases, the units were poorly maintained, and local officials and citizen groups were often opposed to the construction of public housing in their neighborhoods.

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