Construction Sector Still Digging New Lows

For the last six months there has been an expectation that the housing sector was finally going to reach bottom. It seemed logical to assume that the dramatic drop in the price of homes coupled with lower mortgage rates would finally allow the market to stabilize. Unfortunately the bottom continues to recede and each month brings more bad news in terms of the whole construction sector. For the sixth month in a row there has been a reduction in the number of new homes started. Homebuilders are seeing the worst period of their history since 1991. Starts in December were down by 15.5% and in November the decline was 15.1%. The number of starts in all of 2008 was under a million – a little over 900,000. Analysts had expected to see a drop of 4% in December so the 15.5% number came as a real shock.

The reasons for the dip are not hard to see. Despite the low prices in the housing sector and the lower mortgage rates – every other factor that affects the housing market has been negative. The banks are not in the mood to lend for the most part so the lower mortgage rates are not doing anybody much good. The potential borrowers are worried about their jobs and their financial futures and that has been keeping them away from the lenders. Homebuilders are not able to get financing for their projects and many are stuck with an inventory of unsold homes that will take seven to nine months to eliminate – under the best of conditions. Much of the problem for builders as well as for those that are trying to sell existing homes is that the foreclosure issue continues to accelerate. This flood of homes has made it all the more difficult to attract attention in the current real estate market.

The impact in the sector has also shifted from the areas that were the worst hit to those parts of the country that had been relatively immune. Essentially the damage has been done in the Western states and now the problem is expanding. Starts were down by 2.2% in the West but dropped by 22.2% in the South and 24.5% in the Midwest. Only in the Northeast has there been an increase (12.7%).

Analysis: In all this gloom there is a little, tiny ray of statistical hope. It lies in the demographics that normally govern the housing market. Analysts have pointed out that the housing boom that took place in the middle of this decade was not fueled by the usual motivations. There was not a push from young families seeking bigger quarters, there was not a major influx of retirees seeking to downsize, there was not a great deal of internal migration from people seeking jobs or being transferred. The motivation was almost entirely financial and within a short time the push was towards making a killing in real estate, flipping houses and “every man a real estate mogul”.

By the time 2010 and 2011 arrive the demographics start to favor a traditional housing boom. There are young families starting to build pressure and at some point they feel the need to make that move – especially those that elected to start life in the world of condos and lofts. The retiree population was not feeling intense financial pressure until now and this is pushing them towards down market options. Finally there is the pressure of nationally high unemployment as it forces people to relocate for job opportunities. What all of these motivations have in common is that they favor the construction of smaller and less expensive homes.