Market Declining Faster Causing Construction Slowdown
After the five booming years the real estate market experience roughly from 2001 through 2005, industry experts expected a slowdown or correction to take place. How long it would last and how steep the market would slowdown was not exactly known, although it was speculated to just through a little speed bump in the path of thriving home builders and sellers.
That speed bump has turned into a brick wall as the market has declined much more rapidly than anticipated and is showing no immediate signs of slowing down.
Alex Frangos reports the current turmoil experienced by construction home builders, in his article, “Housing Decline Sparks Slowdown In Construction,” which was published in the October 27, 2006 edition of The Wall Street Journal.
The unexpected rapid decline of the U.S. housing market will lead to a drop in construction spending next year, which will also affect areas such as job growth and real-estate development.
“In a closely watched report expected to be released today, McGraw-Hill Construction will forecast the first decline in overall construction spending since 1991. The company says the value of new construction will decline 1% in 2007 to $668 billion, compared with an expected rise of 1% for 2006 and a 12% increase in 2005. McGraw-Hill said the anticipated decline was due mostly to a 5% fall in construction of single-family homes. But the overall drop also reflects a 3% slide in construction of stores and shopping centers, a component closely tied to population growth and home-building trends.”
The single-family housing market has been taking the brunt of the slowdown. Higher mortgage rates and patient buyers have lead to far less single-family homes needed to be constructed. With the current supply being much higher than the demand for single-family housing, buyers do not have to react and seem as if they are waiting for prices to drop lower.
“‘Single-family housing has fallen more steeply than what we had anticipated and the correction is taking place faster,’ says Robert Murray, vice president at McGraw-Hill Construction, a unit of McGraw-Hill Cos. The industry ‘no longer has single-family housing to bolster total construction.’”
“The construction industry accounts for almost a tenth of economic activity, and its contraction could have a ripple effect through the economy as it is a major buyer of finished products and generator of jobs.”
This latest McGraw-Hill forecast comes just a day after a report released by the Census Bureau showed that home builders had to drastically slash prices in order to generate sales. Although new-home sales for September rose 5.3 percent, the result was a steep decline in the median price to $217,100 from $240,400 in September 2005. This markets the largest year-over-year price decline since December 1970.
While residential home construction shows no signs of prosperity at least for the next few months, other construction efforts will continue to support the industry as well as the national economy.
“The continued rapid construction of a wide range of other commercial projects -- hospitals, schools, offices, hotels and factories -- will keep bulldozers and backhoes somewhat busy and the massive construction industry active. That, of course, could be reassuring news for the economy. Spending on commercial construction, including multifamily dwellings, will increase 2.5%. Among the fastest-growing segments are hotels and manufacturing buildings, as well as schools and health-care facilities.”