Wednesday, December 1, 2010

Construction activity remains weak

Construction spending was a bit strong than expected in October, but from the looks of this chart, construction activity is barely holding its own. Residential construction is now at a record low 2.2% of GDP, while nonresidential construction has fallen 10% in the past year.


Benjamin Cole said...

Real estate is dead.
There are whole blocks of empty retail buildings in Beverly Hills. That's how bad real estate is.
Industrial space is taking a hit, and offices in downtown Los Angeles rent for the same price they did--in 1979, under $2 a square foot, per month.
Nothing structural about it--real estate rebounds, and everyone will have jobs again.
If yo have liquidity, a great time to buy SoCal real estate. Low interest rates, people are downcast yet.

John said...


In every economic cycle I have lived through the equity markets have led the economic recoveries that followed. It is not usually a good idea to read too much into one day in the market, good or bad, because markets can be fickle and reverse directions quickly in the short run. But today's action is speaking rather loudly in my opinion. Every market sector is up today, and on high volume. The standout sectors are energy, materials and industrials, sectors that would not be advancing strongly if the economy were not improving.

Last summer the pessimists were telling us Europe was a rotton apple and would sink the global economy. Had one bet that way one would likely have lost money. We are fast approaching year end and, as Scott's posts in those days repeatedly predicted, our markets and economy are better. The correct bet was to buy the lower prices generated by fearful investors fleeing risk assets.

As you point out, properties in your area are still depressed. But I believe that just as the pessimists were proved wrong about the European Union's 'collapse' they will be proven wrong on real estate as well. Financial markets lead recoveries, and we are seeing prices in almost all sectors trending higher. It may still be awhile before prices rise again in your area but they will.

Benjamin Cole said...

Glad to hear your positive view.

You are right, today's trading is a tonic. Wow!

I think I am still long-trerm optimistic; interest rates are going to stay low for a long, long time, and that is good news for the economy, real estate and equities.
My worry is that the current recession drags on a little too long--and so investors lose faith in equities and real estate (remember, the Dow is about where it was in 1999. Some people are gettng weary).

If investors start going into gold, oil paintings, foreign stocks etc, it becmes a self-fulfilling prophesy in some regards. Something like this happened in the late 1970s. Gold hit an all-time high back about then (adjusted for inflation).

We could then get yet another flat cycle for stocks and property. Meaning we don't see an equity or property ralley for another five to 10 years.

Time will tell.

OT but interesting:

Vernon Lomax Smith (born January 1, 1927) is professor of economics at Chapman University's Argyros School of Business and Economics and School of Law in Orange, California, a research scholar at George Mason University Interdisciplinary Center for Economic Science, and a Fellow of the Mercatus Center, all in Arlington, Virginia. Smith shared the 2002 Nobel Memorial Prize in Economic Sciences with Daniel Kahneman. He is the founder and president of the International Foundation for Research in Experimental Economics and an Adjunct Scholar of the Cato Institute in Washington D.C..

Smith today wrote an editorial in the WSJ (A17) advocating Bernanke use QE2 to help banks re-cap mortgages. Interesting, and from a right-winger.

Bill said...

According to some analysts, it could be that we are in a secular bear market due to an aging baby boom population that has reduced spending and the need for housing. Perhaps we'll have another secular bull market in a few years as the next generation forms new families and starts a new cycle of higher spending and the need for new housing. Demographics seems to drive trends in the economy.

John said...


I think Bernanke & Co. are in your camp (or vice versa?). Scott and the other supply side economists may be right saying the economy will be fine without QE2 but it appears to me that the Fed will go ahead with it.

As for most investors losing faith in equities and real estate, I believe they did that two years ago. They ran to CDs, money market and bond funds. They are largely still there. The issue is, will they come back? Many never will but for most I think the need for income, the potential risk in bond funds should longer term rates rise, and a continuing upward trending equity market might be enough to change opinions toward risk assets. We will see.

I will look for Professor Smith's WSJ article. I have been traveling and internet time is spotty.

Happy Holidays, Benj.

McKibbinUSA said...

With deficit hawks winning the day in America and around the world, new construction is likely to remain flat for the many years to come, and perhaps out until 2020 or even 2025. The good news is that existing structures will not be in competition with new construction during those years. High quality real estate with persistent renters are a good buy for those with cash.