Notes from Jim Haughey
Reed Construction Data Chief Economist Jim Haughey discusses how current developments in construction markets and the ecomony will bring opportunities and challenges for designers, contractors, and materials and services providers. His reports will cover near-term building demand, cost and financing changes, and will provide early notice on changes in the detailed two-year construction forecasts elsewhere on this site. Feedback and questions from readers are encouraged.
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Monday, November 5, 2007
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.
Managers of non-financial companies have little interest in how investment managers and their lawyers sort out who ends up with the mortgage default losses. The message from the financial markets over the last four months, “someone has to bail us out or there will be serious problems for the rest of the economy” is rapidly losing credi...Read More
Friday, November 2, 2007
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.
It is now clear that the housing collapse will not have a significant negative impact on the balance of construction or the broader economy. The $91 billion drop in new residential investment over the last year has been overwhelmed by the $40 Billion increase in nonresidential investment, the $80 billion improvement in the trade deficit and the $239 Billion increase in consumer spending.
That last quarters’ 3.9% gain was well above the consensus estimate of 3.0% is also significant. This is an attitude chan...Read More
Thursday, November 1, 2007
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?
Yes, it could but it probably will only slow the pickup in the economy and construction spending.
What the forecast models can not capture it that oil has become a financial commodity. Investors have traded oil for several decades, often very profitably. Remember Enron? But it is only recently that investor activity has scaled up enough to dominate the oil futures markets and thus also set the ...Read More
Thursday, October 25, 2007
There is important site planning information for homebuilders and developers in how different towns and neighborhoods are faring during the steep, metro wide decline in housing permits in most local housing markets. Compare the current location options for prospective homebuyers to their options from late 2003 into early 2006 in most major markets.
Today, homebuyers can realize their location preference because of the huge surplus of available homes, especially existing homes. Two years ago, homebuyers often had to buy wherever they could find a reasonable home for sale. Remember the lines of prospective buyers in California, Florida and other supply-constrained markets hoping that they were close enough to the front of the line to be allowed to buy a home in whatever subdivision was being sold that weekend.
I faced a different type of supply-constrained market w...Read More
Tuesday, October 23, 2007
Four months after it became clear that subprime and Alt A residential mortgages were not worth as much holders paid for them, the financial markets are still sorting out which investors will take the losses. It does not matter to contractors and their suppliers who absorbs the capital losses on these bad mortgages as long it is done slowly and gracefully and without any abrupt negative jolt fed back to the broad economy and hence to construction demand.
The Federal Reserve board minimized the initial shock to the economy last summer. Now the Treasury Department and large banks have taken the lead to prevent significant defaults among the investment funds that hold securities backed by mortgages and other assets. Defaults among these funds are currently the key financial threat to the economy. The default of one these funds, often termed Structures Investment Vehicles (SI...Read More
Wednesday, October 17, 2007
Proposals to cushion the consequences of the housing collapse on financially distressed homeowners have moved to the top of the policy debate in Congress and many state legislatures. Some of the proposals excuse the mistakes that caused the problem, making it likely to happen again. Compassionate assistance to families at risk of losing their homes and much of their net worth needs to be designed without institutionalizing a high risk of a similar housing collapse in the future.
Public officials are demanding that large financial institutions “voluntarily” provide funds to forgive mortgage debts, lower mortgage rates and refinance bad credit risks. Isn’t this how the problem began in the 1990s? Public officials demanded that lenders offer mortgages to people with bad credit, insufficient or insecure income and little, if any, downpayment.
Thursday, October 11, 2007
The commercial real estate market has yet to fully recover from the suddenly higher cost and reduced availability of funds for commercial mortgages that spilled over into their space a few months ago when lenders withdrew from the fraud-ridden subprime residential mortgage market. Most of that problem, however, is now behind us. But now the market is bracing for the scheduled end on December 31st of the federal governments’ no fee reinsurance program for terrorism insurance.
This temporary program began in 2002 in the absence of a private alternative and was extended through 2007. Reinsurance shifts the huge financial risks of terrorist attacks that destroy or damage commercial buildings from the owners of commercial buildings to the US Treasury Department. After large deductibles, insurers recoup some of their casualty losses from the Treasury. Taxpayers are at ris...Read More
Monday, October 8, 2007
The economic environment for construction over the next year got a big boost when the Labor Department added 93,000 jobs to the August job count by correcting a seasonal adjustment error in public employment and also reported 110,000 new jobs in September. A posting a month ago suggested that the August jobs report was implausible and would eventually be revised. It is a huge positive for business confidence that the correction came so quickly. The summer plunge in business confidence, in part due to the erroneous jobs report, is now the major threat to business investment.
There are no readings yet on how business confidence changed after the corrected jobs report. But the immediate positive reaction in financial markets suggests that confidence has improved enough to return the GDP outlook for the next few quarters to 2.0% plus growth.
Looking past the correctio...Read More
Thursday, October 4, 2007
Expect ugly housing market reports for September when the data begin to appear in a few weeks. The peak impact of the collapse of the residential sub-prime and jumbo mortgage markets will hit in September. Weak September reports are expected for permits, starts, home sales, home inventories and home prices. The negative impact from the mortgage markets will linger for several more months but will be progressively less significant after September.
The September reports you see in a few weeks are trailing data. Mortgage market conditions have already improved — but not back to the pre-crisis level of last July. Nonetheless, Reed Construction Data expects housing activity to recover slightly in the fall from the depressed August/September level.
For example, the August drop in housing starts was primarily in the Northeast and West where jumbo mortgages are the...Read More
Monday, September 24, 2007
The surprise strike by the UAW against General Motors on September 24th is a “meow” compared the lion’s roar of national strikes against auto companies in the distant past. The last national auto strike was against Ford in 1976. 77,000 workers are on strike, a small fraction of UAW employment at GM in the postwar period well into the 1980s. The share of GM vehicles (and parts) made outside the US is many times the share when the UAW last struck GM.
The current strike will take a bite of yet undetermined size out of economic activity in September, probably October and possibly beyond October. But this is a minor event for the overall economy compared the collapse of housing starts early in 2006 which is still dominating economic trends. Reed Construction Data has not trimmed the outlook for the economy or construction but will have to do so if the strike ...Read More
Friday, September 7, 2007
The 4,000 job loss reported for August is bad news for the next year, whether it is sustained in the next Jobs report on October 5th or revised away. It is never a good bet to assume a substantial revision that changes initially reported trends. That said, the August job loss was totally unexpected. All of the tracking models for the month to month job change expected 100,000 plus new jobs. The job indexes from Monster.com, ADP (payroll services) and Manpower (temporary help agency) all suggested somewhat weaker job growth but no hint of an outright decline.
Reed Construction Data will mark down both the economic and construction forecasts for the balance of this year and 2008. Details will be posted on this site in a few days. GDP growth will likely sink to 1-2% in the second half of the year before gradually rising back to the 3% sustainable trend at the end of 2008....Read More
Monday, August 27, 2007
July’s 2.8% rise in new home sales to an 870,000 annual rate provided a morsel of relief to beleaguered homebuilders. Unfortunately it is not a new trend because these are pre “mortgage crisis” sales. Sales in the next few months are far more likely to dip than rise. Reed Construction Data still believes that the decline in new home sales is essentially over but that there won’t be sustained improvement for several months.
The disruption of the non-prime mortgage market over the last month almost certainty caused the delay or cancellation of some planned purchases with nonprime mortgages and some of this will continue for a few months. Prospective buyers are being hit with higher than expected mortgage rates and the inability of the lender to come up with the needed cash. Ahead, some buyer will delay believing that the ugly news from the mortgage m...Read More
Thursday, August 23, 2007
First, the subprime mortgage crisis appears not to have caused an extended credit crunch thanks to quick, aggressive action by the Federal Reserve Board. So, very little of the problems in the housing market will spill over into the rest of construction or the broader economy. Nonetheless, there will be a further delay in the recovery of the housing market, a marginal drop in demand for nonresidential space and facilities but no direct negative impact on public construction.
Into the 1970s, residential mortgages were largely made only by Savings and Loan Associations or other savings banks and were not sold but kept within the S&Ls, financed by consumer deposits. To get a mortgage, you first opened a savings account at an S&L and then applied to a lending officer who lived in the same community. You had to demonstrate that you had 10% or more collateral, sufficie...Read More
Monday, August 13, 2007
Financial markets remain in turmoil around the world as the fallout from the US subprime mess spreads. This is now the biggest risk to the investment spending that finances the construction industry. While it is likely that markets will calm quickly before serious damage occurs to construction funding, the risk continues until this happens.
The major central banks pumped $100 billion into commercial banks in the last few days to assure that there was enough liquidity to permit banks to meet loan commitments and investment funds to honor withdrawal requests. The worst nightmare for any central banker is having to cope with a perception among investors that they can not get their money when the want it.
The current crisis developed slowly over the last year as the holders of bonds backed by subprime mortgages sparred with mortgage brokers and the wholesalers that pa...Read More
Thursday, August 2, 2007
There were two tidbits of good news for homebuilders and their suppliers in the June report on existing home sales even though the annual sales pace fell from 5.98 to 5.75 million. The report from the National Association of Realtors showed that home prices rose from recent months and were about the same as a year ago and that the inventory of existing homes for sale fell 182,000 units after rising 928,000 units in the previous five months.
Both of these changes are necessary conditions for housing starts to rebound. Home prices are critical because many prospective homebuyers are waiting for home prices to hit bottom and signal that is OK to buy a house without paying too much. A return to stable or rising prices would also boost sales by making housing assets more liquid — sales could be completed faster with more certainty about the price. June’s report is ...Read More