Reed Construction Data Chief Economist Jim Haughey discusses how current developments in the US economic environment will bring opportunities and challenges for designers, contractors, and materials and services providers.
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The unexpectedly small 18,000 job gain in December threatens to destabilize the fragile financial market yet again and push buyer confidence even lower. By itself, one weak month of job growth is usually not so significant. But investors and business managers had been trying to conduct “business as normal”, hoping for no more bad news. Now it has happened.
The availability of construction funding remains fragile and is a major threat to construction starts and spending in 2008. Commercial developers report increasing difficulty obtaining construction financing with the full impact of this yet to seen in construction starts. The fixed rate subprime and jumbo residential mortgage markets are still short of funds and continue to ration credit with premium mortgage rates and tighter approval standards.
The Federal Reserve Board stepped into the mortgage week this week to price and make a market for the collateralized debt obligations (CDO’s) that funded subprime mortgages. This could be what was needed to loosen the recent constraints on construction funding.
Applications for mortgages, especially for refinancing, jumped sharply at the end of November and stayed high in the first week of December. The Mortgage Bankers Association of America reported that its index of applications for new purchases is now at a 22 month high and its index for refinancing applications is the highest in nearly four years.
The specter of two million teaser rate subprime mortgages resetting to higher interest rates next year is a nightmare for the housing, mortgage and investment industries, may push the broader economy into recession and is a personal disaster for hundreds of thousands of homeowners who will lose their home or be forced to constrain the rest of their household budget to keep their home.
Home sales declined further in October signaling that the housing recession has not yet reached bottom. Combined new and existing home sales fell 48,000 (annual rate) but the drop was 90,000 compared to the initial September estimates before they were revised lower. The now reported month to month decline was at a 10% annual pace. While this is a slowdown from earlier in the year, it is far too high to indicate a turnabout to sustained sales increases in the next few months.
Summer GDP growth will soon be revised from an already high 3.9% to a booming 4.5-5.0% pace. Normally, this would be great news for construction demand — but not this time. The growth spurt is due to accumulating unwanted inventories and slowing import growth to accommodate more cautious consumers. The growth spurt is the prelude to several quarters of 1-2% economic growth, possibly lower, that will stretch out the already long process of absorbing the huge excess of homes for sale, reduce the expected profitability of new commercial buildings and also reduce the growth in tax receipts and investment earnings that finance institutional buildings and public works. The impact on housing will be more immediate than on nonresidential construction spending.
166,000 more jobs in October is more evidence that Main Street is paying little attention to Wall Street. After a two month pause, hiring has picked up except in housing construction and related industries. Business managers were jolted last summer by fears that the abrupt recognition of huge losses in non-traditional mortgages could spread higher borrowing costs and capital shortages to the broader economy. But now they have restarted expansion plans after seeing only minimal damage outside of the financial and housing markets.
GDP grew at a 3.9% pace in the summer quarter but the underlying growth trend through next year remains at 2.5%. While subpar, this is enough to keep nonresidential construction expanding, although at a slower pace and to cushion the drop in home prices which is keeping prospective homebuyers on the sidelines as they wait for the bottom of the price cycle.
The price of crude oil has been labeled overpriced in economic models for several years with quick, substantial declines predicted. However, the price of crude oil keeps rising and is now over $90/bbl. for the high quality blends that serve as industry price benchmarks. How does this happen? How long can it continue? And could it derail the expected improvement in economic growth and the accompanying rise in demand for building space and facilities?
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