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Housing Decline Sparks
A Construction Slowdown

By Alex Frangos
From The Wall Street Journal Online

The unexpectedly rapid decline of the nation's housing market will mean an overall drop in construction spending next year, with spillover effects in 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.

"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. Local governments' ability to raise revenue through development fees and taxes, especially in fast-growing parts of the country, could suffer as well.

The McGraw-Hill forecast comes on the heels of a report yesterday by the Census Bureau showing that home builders have had to slash prices to sell homes. Although new-home sales for September rose 5.3% to a seasonally adjusted annual rate of 1.075 million, the median price fell to $217,100 from $240,400 a year earlier. That was the lowest price in two years and the biggest year-over-year decline since December 1970.

Meanwhile, at a conference yesterday in Washington, David Seiders, chief economist of the National Association of Home Builders, predicted average prices of single-family homes will drop next year. It is the first time the trade association has predicted a price decline in roughly a decade of providing estimates.

Mr. Seiders blames a confluence of factors for the anticipated declines, including overbuilding, prices that have outpaced incomes, and rising inventories of unsold new and resale homes. The imbalance between supply and demand, as buyers continue to sit on the sidelines waiting for prices to drop, has already had a big impact on builders.

In the second quarter of 2006, the annual rate of single-family starts fell 41.2% to 1.53 million, while "permits are in free fall," Mr. Seiders says.

To be sure, prices still remain higher than several years ago and many consumers maintain hefty amounts of equity in their properties. Moreover, mortgage rates remain near historical lows and prices remain stable in many markets. Yet the latest news has prompted some economists to question whether the construction industry will become a drag on economic growth or whether the worst has already been felt.

Yesterday, former Federal Reserve Chairman Alan Greenspan said he saw "early signs of stabilization" in the housing market. Mr. Greenspan noted in a speech to the Commercial Finance Association that a weekly index of applications for home-purchase mortgages, compiled by the Mortgage Bankers Association, has "flattened" at relatively high levels. The index plunged in the second half of 2005 and early this year, but lately has been steadier. It is currently 18% below the year-ago level.

"We've already had the hard landing," Angelo Mozilo, chief executive officer of Countrywide Financial Corp., the nation's largest home-mortgage lender, said in a conference call this week. Mr. Mozilo said he expects the mortgage market to "tread water" in 2007. "In 2008," he added, "we'll have one hell of a year for people who remain in the industry" as demand rebounds.

U.S. home prices rose an average of 58% in the five years ended Dec. 31, according to an index produced by the Office of Federal Housing Enterprise Oversight. In some cities, prices more than doubled in that period. Over the past year or so, house prices have declined moderately in many areas -- including Massachusetts, the Washington, D.C., area and parts of California, Florida and Arizona -- but they remain far above their levels of a few years back.

Some of the negative effects from the housing slump are likely to linger well into 2007 and perhaps much longer. Some economists think housing prices will continue to drift downward through much of next year. That may damp consumer confidence, and it will diminish consumers' ability to borrow against their homes to finance spending. And foreclosures are expected to rise at least modestly; that could prolong weakness in housing as lenders dump properties on the market.

"We're not out of the woods yet," says Peter Kretzmer, a senior economist at Bank of America in New York.

Mr. Murray at McGraw-Hill Construction concurs. Just weeks ago, he was figuring there would still be growth next year. "We thought the correction [in the housing market] would be, in the words of Fed chairman, 'orderly,' " he says. But recent data have shown it is "not as orderly as what people thought."

But the decline won't be limited to housing. Also expected to see a falloff is the construction of retail centers, whose development has been consistently strong in recent years as consumer spending and housing formation grew.

The link between retail construction and home building is strong. "When there's a new neighborhood, there's a new grocery store and pizza parlor in a small shopping center," says James Haughey, director of Research and Analytics at Reed Construction Data, a Norcross, Ga., publisher of building information and a unit of Reed Elsevier Inc. He doesn't see retail falling off right away, however, as retailers are still catching up to consumer growth. "It will be a delayed impact because the pipeline of shopping centers is so full," Mr. Haughey says.

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.

Construction activity has a major impact on the overall economy. Census Bureau estimates of construction spending, which rely on McGraw-Hill's numbers while adding other spending categories, showed $1.2 trillion of spending on construction in the year ended August.

The fallout is being felt at some of the nation's largest home-building companies, which are downsizing staffs. Pulte Homes Inc. of Bloomfield Hills, Mich., said yesterday it has reduced its work force by about 10%, or 1,400 full-time jobs, since Jan. 1. The cuts have been made throughout the company and across the country. "We've taken these measures in response to lower housing demand, which has resulted in a reduction in construction volumes," Pulte spokesman Mark Marymee said.

Centex Corp., a large builder based in Dallas, said this week that its salaried work force has been reduced by about 10% since April 1 to around 6,400 employees.

In the Phoenix area, construction accounts for 10% of salaried jobs, "and they are pretty good-paying jobs," says Jay Q. Butler, director of the Arizona Real Estate Center at Arizona State University. He sees the slowdown in the home-building sector being offset somewhat by strength in health care, schools, convention centers and highways. He cautions, however, that local governments that rely heavily on fees garnered from home builders could face fiscal crises. Several municipalities in his area, he says, are considering instituting or augmenting fees on commercial developers to make up for the projected shortfall.

Some developers could benefit from the housing downturn as demand for materials such as gypsum, copper electrical wire and lumber drop. Already this year, prices for those products have fallen. Falling house prices would also bring welcome relief to buyers who have been buffeted by steadily rising price tags.

Certain sectors of the commercial construction industry could continue to grow. Hotel construction spending, for instance, was up 64.4% to $21 billion in August on a seasonally adjusted annual basis, according to the Commerce Department. Though McGraw-Hill predicts no growth in hotel spending, others think the increase is likely to continue in 2007. "The rebound in [hotel] construction is everywhere," says Bjorn Hanson, head of the hospitality-and-leisure practice for PricewaterhouseCoopers LLP.

About 70% to 80% of the hotels, says real-estate consultant Patrick Ford, are popping up near freeway exits with limited meeting spaces and food service. The area around Dulles International Airport in Virginia is adding 22 hotels, most in that mold, according to Mr. Ford, president of Lodging Econometrics in Portsmouth, N.H.

Manufacturing and industrial construction will grow thanks partly to the mushrooming of ethanol plants in the wake of federal legislation mandating increased supplies of the fuel additive. Matt Hartwig, spokesman for the Renewable Fuels Association, an ethanol trade group, says there are more than a "couple hundred" ethanol plants in development, with 46 under construction.

The office-building sector is also expected to grow as it reacts to recent job growth and business expansion. Office-vacancy rates nationally hit 13.5% in the third quarter, the lowest since the third quarter of 2001, says Sam Chandan, chief economist at Reis Inc., a New York-based research firm. And bond issues passed in several states to accommodate growing school-age populations has meant a classroom building boom. Fast-growing states such as Arizona and Nevada are adding dozens of schools a year.

-- James R. Hagerty and June Fletcher contributed to this article.

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管理人のコメント

不動産市場、特に新築一戸建て需要の低迷が、関連業界である、建築業界に、波及効果をもたらしているという分析です。業界トップ、マグローヒルは、1991年以来の初めての業績下降。

建築業界は、なんと、アメリカの経済活動の10%をを占めるという大産業。関連して、税収の低下なども、懸念されています。