From a small northwestern observatory…

Finance and economics generally focused on real estate

1/30/09 — Stacking the Dominos Back Up

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I’m a Member of the Faculty of Valuation of the Royal Institution of Chartered Surveyors, headquartered in Great Britain.  The only reason I mention that is they do a great job — much better than their American counterparts — at tracking and reporting information on construction, valuation, etc. 

I received a very insightful missive from them this morning about U.S. residential construction.  (Please don’t miss the irony here — a Seattle-based real estate economist depends on Londoners to report on U.S. construction trends.)  Employment in the residential construction sector has been falling for 18 straight months, with 100,000 jobs lost in December alone.  Note that all job losses in the U.S. in November and December totalled about 1-million, so residential construction losses in December accounted for about 10% of the total job losses.  As of the end of 2008, housing starts are about as low as they’ve been in the past 40 years, and show no signs of doing anything but getting lower.

The President, Congress, and… well… everyone is committed to getting employment back up.  Simply throwing money at the housing sector isn’t even close to being enough.  There are a whole series of dominos which have fallen down, and before the residential construction domino can be picked up, all the rest have to be picked up as well.  Builders and developers won’t commit to the risk of starting houses without some promise that these homes will be bought.  For that to happen, the housing demand equation has to get back up on its feet again.  For THAT to happen, buyers have to have some promise that home prices will quit tanking AND they have to have savings for down payments AND the nation needs a healthy lending infrastructure in place. 

I tend to be a “glass half full” kinda guy, but clearly the residential construction industry will remain moribund until the employment numbers turn around, until the foreclosure mess gets fixed, and until the banking industry is working and lending again.  Here’s the good news — there are glimmers of light at the end of the tunnel.  Congress and the White House seem to be speaking with one voice on fixing things and getting people back at work.  In general, economists forecast that unemployment will get a little bit worse this year, but not by the sort of huge numbers we saw at the end of 2008.  Brace yourself for a round of corporate bankruptcies, but most of those are already discounted by the markets and most of those have already suffered layoffs.

There is a substantial generic demand for housing in the U.S. — our population continues to grow, particularly on the two coasts.  Some theorists suggest that over-wrought lending preciptated too much construction (our rate of home ownership briefly touched 70%, and there are theories that this number should be closer to 60%).  The prolonged construction nadir will sop up any excess supply in the market.  Remember —  millions of homes per year are still being bought, even though we’re in a recession.   In short, once our economy starts back up out of the recession, the residential construction sector should react quickly.

In the meantime, investors who are bottom-fishing for bargains might consider that the window of opportunity won’t be open forever.

Written by johnkilpatrick

January 30, 2009 at 9:14 am

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