The 2023 data begins with another lesson: the cure for high prices is - high prices

by a New Deal Democrat

And so another year begins. And it starts with a look at the leading residential sector. And besides, there’s even some good news.

Total construction spending in November rose 0.2% on the month, while the more leading homebuilding spending fell -0.5%. While overall construction spending fell just 0.6% from its recent peak in July, housing spending fell -8.1% from its recent peak last May:

This is in line with the steady pace of negative housing news over the past year.

Generally speaking, housing construction costs are aligned with the number of homes being built. But in 2022, as in 2018-19, spending (blue) declined, while the number of units under construction (red) rose slightly:

The answer probably lies in the cost of building materials, for which there is a special inflation index shown in gold on an annual basis below compared to the year-on-year change in housing costs:

The cost of materials rises and falls with a lag after there is a boom or bust in construction. It happened in 2018-19, it happened in 2022 as well. The price of construction materials, which had risen by as much as 35% year-on-year a year ago, was up just 0.6% year-on-year as of November!

The cure for high prices is – high prices. The good news is that as the rise in building material prices has fully subsided, some of the pressure on construction sales is being lifted.

As I’ve mentioned several times before, while I’m watching bullish indicators like employment and consumer spending turn down, I’m already on the lookout for a positive turn in some long leading indicators. And the slowdown in the increase in construction costs in the housing sector is one such sign.

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