Tuesday, January 3, 2012

The outlook for construction brightens

November construction spending beat estimates, but that's pretty old news by now. I think the more important observation is that both residential and nonresidential construction appear to have hit bottom, as this chart shows. Residential construction has been flat for almost 3 years, and nonresidential construction has been flat for almost 2 years now.

Real estate markets operate with very long lags (typically 5 years or so), and construction activity has had plenty of time to adjust to the surplus of homes that appeared in 2006. That was a painful adjustment that required massive amounts of the economy's resources to shift from the construction sector to other sectors. Meanwhile the population continues to grow, the economy continues to grow, incomes continue to grow, and sharply lower real estate prices and historically low mortgage rates have allowed the market to unload a ton of excess housing inventory. The real estate problem, in short, most likely has been largely solved. Instead of worrying about whether more foreclosures are going to cause another price collapse and further reductions in construction activity, it makes more sense to wonder when construction activity and prices will begin to pick up, and by how much.

The good news, in other words, is that we have probably seen the end of the bad news in the housing and construction sectors. The lack of more bad news will optimism to return to a market that has been literally crushed by the worst setback in modern memory.


Benjamin Cole said...

Looks like construction spending hit bottom in early 2010 and has stayed there...a miserable failure for Obama and the Fed.

Unknown said...

Construction may have bottomed but I don't think prices have yet to bottom.

The problem for 2012 and the foreseeable future will continue to be an imbalance between supply and demand.

The banks are going to start clearing out the delinquent mortgage squatters. These houses will increase the supply of for sale homes, and the sellers will be motivated. The displaced former owners will not have the down payment or qualifying credit to buy anther house. This removes them from the potential buyer pool and reduces demand. So what we are left with is an increase in the supply of motivated sellers and a decrease in demand. That spells trouble for home prices.

Delinquency rates will not see the bid declines lenders are hoping for as strategic defaulting becomes more epidemic in 2012.

One of the biggest stories of 2012 will be the increased foreclosure rates at Bank of America. Since they have such a large market share, their activity will force the other banks to react or risk being left holding worthless assets. If a few of the major banks start competing to foreclose on their delinquent mortgages and liquidate their REO, a stampede for the exit may ensue. The lending cartel may collapse. If that happens, prices could fall significantly more than predicted.

Based on Bank of America’s behavior at the end of 2011, they appear to be desperate for cash. A collapse of the cartel may be imminent.

Source: OCHousingNews: Predictions for 2012

Bill said...

The other major development will be a mountain of non-recourse commercial RE loans that will default this year. The servicers are already seeing an alarming number of distressed loans that were issued in 2007 at the peak. I think we will have at least another year of distress before we see a recovery.

Benjamin Cole said...


People mistakenly believe it was "Fannie and Freddie" that gave rise to the residential real estate boom-bust. But USA commercial had a worse bust, no Fannie, Freddie etc.

It was the Fed---fighting inflation at precisely the wrong moment, when the economy was weakening.

There was nothing to prevent a much more healthy gradual flattening out of rising real estate values---except a dunderheaded Fed, and a peevish fixation with inflation.

Unknown said...

when do the rest of you think the FHA sticks its hand out for a bail out?

"The FHA has been denying it needs a bailout. Their denials don’t seem plausible. The FHA has been providing a significant portion of the financing for the US housing market with 3.5% down payments. If those buyers wanted to sell, they couldn’t cover the commissions to leave. They are underwater from the moment they buy. To make matters worse, prices have been steadily falling, so none of them gained any equity over time.

In short, the entire FHA loan portfolio is effectively underwater. And since few of those borrowers have any real money in the transaction, they are prime candidates for strategic default if the need or want to leave.

The FHA doesn’t have much for reserves to cover the inevitable losses. A bailout is almost a certainty, but since the FHA has given strong assurances it doesn’t need a bailout, everyone involved will at least act surprised."

Source: OCHousingNews: Predictions for 2012

Benjamin Cole said...


It would have been a lot cheaper for taxpayers, and banks, if the Fed had merely reflated property values, instead of fighting commodities inflation and driving a torpedo into the economy.

Dylanarman said...

If you have water leaking from your ceiling, there is a nice chance that you have a home construction issue.

Association Management

Mark Gerber said...

Happy New Year Scott!
When you consider population growth trends for housing, do you also consider the increasing trend fir multi-generationalhousing occupancy?

McKibbinUSA said...

The two-year flatline in both residential and non-residential construction evidences economic depression along Main Street USA --the Main Street depression in America is the sacrifice that the Federal government has tendered in order to save the institutions and employment sectors that are more dear to Federalism itself -- other evidence includes the decade-long declines in real working wages and the employment to population ratio, the sharp declines in residential home values, and the horrific numbers of foreclosures across America -- in fact, the fiscal policies of the US may eventually prove fruitful for Main Street (though probably not for at least another decade or more) -- however, those Americans who are relying upon Main Street opportunities are destined for the poor house -- that's America today -- everyone who wants to "make it" should acquire world-class skills, and rent and dividend-earning equities in an honest effort to get off Main Street and to join cosmopolitan society -- the realities of economic depression along Main Street are going to be very hard on those Americans who make Main Street their home and livelihoods...

McKibbinUSA said...

PS: The US has essentially "written off" Main Street USA in an effort to save Federalism (and cosmopolitan society) from itself...

Steve K said...

The Federal Reserves policy of "extend and pretend" has resulted in all of us subsidizing homeowners(maybe I should say "home occuppants")in McMansions, to stay in their homes for 2 years, rent free.

These folks hire lawyers and play gotcha games with the lenders, and any other parties that had a hand in the original loan process, ie. mortgage broker, appraiser, etc.

The monthly payments for some of these mortgages are $7000 on up. The shoddy work by the banks opened themselves up to this scam.

Hopefully, this nonsense will stop, and the real estate market can find a bottom, and clear the supply.