The U.S. House of Representatives voted 363-64 to pass a six-year, nearly $325 billion highway and transit bill after a contentious vetting of proposed amendments and an intense debate about federal gas taxes. The measure must now be reconciled with the Senate version of the bill.

The Surface Transportation Reauthorization & Reform Act (STRRA) calls for spending $261 billion on highways and $55 billion on transit over six years. The legislation authorizes highway funding for six years, but only if Congress can come up with a way to pay for the final three years.

The Highway Trust Fund provides most of the program’s funding based on a gas tax of 18.4 cents per gallon set in 1993. The fund hasn’t kept pace with construction demands against inflation and because cars are using less fuel. Democrats had urged an increase in the gas tax or other user fees, to allow more highway and bridge construction. But the Republican-controlled Rules Committee blocked consideration of those proposals.

To bolster more construction, the House legislation included Senate provisions including $17 billion from the Federal Reserve System paying banks smaller dividends, a $9 billion sale from the Strategic Petroleum Reserve and $5 billion more from the Internal Revenue Service contacting with private entities for tax collection.

A conference committee, consisting of House and Senate members and chaired by House Transportation and Infrastructure Committee Chairman Bill Shuster (R-Pa.) will merge the House and Senate bills into one that both chambers must pass.

Construction Outlook

Dodge Data & Analytics released its 2016 Dodge Construction Outlook, a mainstay in construction industry forecasting and business planning. The report predicts that total U.S. construction starts for 2016 will rise 6 percent to $712 billion, following gains of 9 percent in 2014 and an estimated 13 percent in 2015.

“The expansion for the construction industry has been underway for several years now, with varying contributions from each of the major sectors,” stated Robert Murray, chief economist for Dodge Data & Analytics. “Total construction activity, as measured by the construction starts data, is on track this year to record the strongest annual gain so far in the current expansion, advancing 13 percent. Much of this year’s lift has come from nonbuilding construction, reflecting the start of several massive liquefied natural gas terminals in the Gulf Coast region, as well as renewed growth for new power plant starts. Residential building, up 18 percent this year, has witnessed continued strength for multifamily housing while single family housing seems to have re-established an upward trend after its 2014 plateau. At the same time, nonresidential building has decelerated this year after surging 24percent back in 2014, and is now predicted to be flat to slightly down given a sharp pullback for new manufacturing plant starts and some loss of momentum by its commercial and institutional building segments.”

“For 2016, the economic environment should support further growth for the overall level of construction starts. While short-term interest rates will be going up in 2016, given the expected rate hikes by the Federal Reserve, the increases in long-term interest rates should stay gradual," Murray continued. "On the plus side, the U.S. economy continues to register moderate job growth, lending standards are still easing, market fundamentals for commercial real estate continue to improve, and more funding support is coming from state and local construction bond measures. Total construction starts in 2016 are forecast to advance 6 percent to $712 billion, with gains for residential building, up 16 percent; and nonresidential building, up 9 percent; while the nonbuilding construction sector retreats 14 percent. If the volatile electric power and gas plant category within nonbuilding construction is excluded, total construction starts for 2016 would be up 10 percent, after a corresponding 8 percent gain in 2015.”

The 2016 pattern by more specific sectors is the following:

• Single-family housing will rise 20 percent in dollars, corresponding to a 17 percent increase in units to 805,000 (Dodge basis). Access to home mortgage loans is improving, and some of the caution exercised by potential homebuyers will ease with continued employment growth.
• Multifamily housing will increase 7 percent in dollars and 5 percent in units to 480,000 (Dodge basis), slower than the gains in 2015 but still growth. Low vacancies, rising rents, and the demand for apartments from Millennials will encourage more development.
• Commercial building will increase 11 percent, up from the 4 percent gain estimated for 2015. Office construction will resume its leading role in the commercial building upturn, aided by more private development as well as construction activity related to technology and finance firms.
• Institutional building will advance 9 percent, picking up the pace after the 6 percent rise in 2015. The educational facilities category is seeing an increasing amount of K-12 school construction, supported by the passage of recent school construction bond measures.
• Manufacturing plant construction will recede an additional 1% in dollar terms, following the steep 28 percent plunge for 2015 that reflected the pullback by large petrochemical plant starts.
• Public works will be flat with its 2015 amount, as a modest reduction for highways and bridges is balanced by some improvement for the environmental public works categories. A new multiyear federal transportation bill is being considered by Congress, and is expected to achieve passage in late 2015 or during the first half of 2016. The benefits of that bill will show up at the construction site later in 2016 and into 2017.
• Electric utilities and gas plants will fall 43 percent after a sharp 159 percent jump in 2015. The lift coming from new starts for liquefied natural gas export terminals will be substantially less, and new power plant starts will recede moderately.

Housing Market

Steady employment and economic growth, pent-up demand, affordable home prices and attractive mortgage rates will keep the housing market on a gradual upward trend in 2016. However, persistent headwinds related to shortages and availability of lots and labor, along with rising materials prices are impeding a more robust recovery, according to economists who participated in the recent National Association of Home Builders (NAHB) Fall Construction Forecast Webinar.

“This recovery is all about jobs,” said NAHB Chief Economist David Crowe. “If people can get good jobs that pay decent incomes, the housing market will continue to move forward.”

The good news, Crowe added, is that total U.S. employment of 142 million is now well above the previous peak of 138 million that occurred in 2008.

The one caveat is that job growth has been concentrated heavily in the service sector, which tends to pay lower wages than goods producing jobs.

Meanwhile, home equity has nearly doubled since 2011 and now stands at $12.5 trillion.

“The single biggest asset in most people’s portfolio is the home they own,” said Crowe. “That’s important because the primary purchasers of new homes are the sellers of existing homes. The more equity they have, the more comfortable they feel about purchasing a new home.”

Crowe noted several factors that are hindering a more robust recovery. Citing an NAHB survey of its members, 13 percent of builders reported the cost and availability of labor was a significant problem in 2011 and that concern jumped to 61 percent in 2014.

About one-fifth of builders shared the same concerns regarding lots in 2011 and that ratio shot up to 58 percent in 2014.

Concerns over building materials stood at 58 percent among builders in 2014, up from 33 percent in 2011.

Turning to the forecast, NAHB is projecting 719,000 single-family starts in 2015, up 11 percent from the 647,000 units produced last year. Single-family production is projected to increase an additional 27 percent in 2016 to 914,000 units.

On the multifamily side, production ran at 354,000 units last year, slightly above the 331,000 level that is considered a normal level of production. Multifamily starts are expected to rise 9 percent to 387,000 units this year and post a modest 3 percent decline to 378,000 units in 2016.

Residential remodeling activity is forecasted to increase 6.8 percent in 2015 over last year and rise an additional 6.1 percent in 2016.

Delving into the national numbers, NAHB Senior Economist Robert Denk said that housing market conditions are improving in all regions, but the pace of recovery continues to vary by state and region.

“We’ve gotten to the point in the recovery where we no longer have problems that came with the housing bust,” said Denk. “It now is really a matter of housing markets reconnecting to the fundamental drivers, and that is employment. Production has been rebounding in all regions, prices have been moving up and new foreclosures are back to more normal levels.”

In another way of looking at the long road back to normal, by the end of 2017, the top 40 percent of states will be back to 99 percent or more of normal production levels, compared to the bottom 20 percent, which will still be below 73 percent. “Keep in mind that with all of these buckets, the numbers keep getting higher,” said Denk. “There is broad-based improvement across the country.”