Economic trends point to long-term opportunities for Utah’s construction industry

Robert Spendlove 

Waiting over the past few years for inflationary pressures to ease and interest rates to fall has been as painstaking as watching concrete dry. But Utah’s residential and commercial builders ought to remain confident in the long-term outlook for the state of Utah. Several macroeconomic factors should be taken into account in evaluating Utah’s current construction sector.

In-migration Continues

Demographic trends drive much of the economy, especially residential housing demand. Utah’s population continues to grow, although the annual growth rate slowed to 1.1 percent in 2023, according to the U.S. Census Bureau. Ranking 10th in the U.S. for population change, Utah grew twice as fast as the nation over the same period. Demand for housing and commercial space is likely to continue due to continued migration trends in Utah. Net in-migration was 11,623 from 2022 to 2023, according to the Census Bureau. Utah’s total population growth ranks 22nd in the United States.

Numerous publications and studies point to the Beehive State among the top in the U.S. in terms of its economy and business-friendly environment. Ranked as No. 1 for the “Best Economic Oulook” for the 17th consecutive year by Rich States, Poor States, Utah also boasts three of the top 10 “Best Cities for Starting a Business,” according to an April Wallethub report. The state also ranked No. 1 for a second straight year in U.S. News & World Report’s “Best States” rankings, which evaluates categories including opportunity, economy, infrastructure and fiscal stability.

The strong population growth coupled with the state’s business-friendly policies suggests a positive outlook for housing and commercial construction opportunities long-term.

Residential Trends Tied

to Interest Rates

In May, average 30-year mortgage rates in the U.S. hovered around 7 percent, a steep increase from January 2021 when rates dropped below 3 percent. Nevertheless, the current 30-year rates are still below the average rate of 7.73 percent over the past half century.

The dramatic increase in mortgage rates in the past three years has effectively locked in existing homeowners. For decades, homeowners benefited from the downward trend in rates. They could refinance an existing mortgage loan to a lower rate and financially benefit from the lower payment. This housing optimization fueled housing churn and overall economic growth.

The opposite effect is now happening. Existing homeowners who refinance a mortgage or buy a new home now face higher payments on new loans with higher rates than existing mortgages. The effect of this is existing homeowners are more reluctant to refinance or move. The turnover of homes has slowed. Starter homes are becoming long-term homes as young families are staying in place longer. On the other end, older empty-nest couples are holding on to their larger homes even after the kids have left.

Issues Affecting Slowed Housing Turnover

Lower mortgage rates would soften this effect, but it could also fuel a resurgence in home prices and more housing inflation — which the Federal Reserve wants to avoid. The “higher for longer” rate environment will force a paradigm shift in how housing impacts a number of economic, mobility and wealth-building decisions.

A possible solution is to build lots of new housing units to keep up with demand, but homebuilders are pulling back, so the shortage of housing units is increasing again. As a result, new private housing building permits are trending down in Utah, totaling 25,645 in 2023, according to the Census Bureau.

The Kem C. Gardner Policy Institute estimates that Utah needs to build an additional 153,000 new housing units to get back to equity with household demand.

Housing and Services Prices Exacerbate Inflation Pressure

As we continue to monitor inflation, it’s important to note the price changes of housing and services categories. While goods inflation has dropped back to pre-surge levels, the inflation for housing and for services remains elevated. This has surprised central bankers, and it makes their job of normalizing the economy more difficult.

Housing inflation remains high, with year-over-year changes in pricing at 3.6 percent for the Mountain states, which is thankfully lower than the U.S. housing inflation rate of 4.5 percent, according to the U.S. Bureau of Labor Statistics. In April, median home sales prices in Utah were up 4.2 percent to $500,000, according to the Utah Association of Realtors.

While the Federal Reserve is determined to achieve its mandate of broad price stability, the stubbornness of housing price inflation is an example of how the path back to normal can be bumpy.

Commercial Real Estate Trends Often Follow Residential Trends

With the Federal Reserve anticipated to keep interest rates flat for the time being, financing costs may result in reduced CRE demand. Additionally, commercial real estate risk has changed over the past few years. Hotel and hospitality default risk rose following the lockdown period of the pandemic, but has fallen in recent years as people return to travel and vacation, according to data from the Board of Governors of the Federal Reserve System. Office default risk continues to rise, as historic distortions in remote working coupled with higher interest rates are pressuring office building owners.

Costs Still Running High as Construction Jobs Grow

Construction labor and materials costs have been running high, in part driven by the expansion of federal infrastructure projects and increased multi-family building in the aftermath of the pandemic. While these costs appear to have plateaued, they are still running 42 percent higher than pre-pandemic levels. The year-over-year increase in the Producer Price Index’s report shows construction materials staying nearly flat from April 2023 to April 2024, with a decrease of 0.3 percent.

Employment in most Utah industry sectors grew over the past year, totaling 2.3 percent, according to the U.S. Bureau of Labor Statistics. The construction sector experienced the state’s third-largest employment growth in the past year, adding 7,400 jobs with a 5.6 percent increase. Nationally, construction jobs grew 3.2 percent over the same period.

To balance the impacts of economic and market shifts, construction industry professionals can take a long-term approach in a state with economic data trending toward growth on several economic points. The Beehive State’s demographics and diversified economy continue to be a source of strength.

Robert Spendlove is Zions Bank’s senior economic and public policy officer. His monthly Utah Economic Outlook reports and other presentations are available at www.zionsbank.com/economy.