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Over 1 million Construction Jobs Still Needed For 'Normal' Growth

by devteam October 23rd, 2013 | Share

In its October Outlook Freddie Mac says that the resurgent housingrnmarket supported economic growth in the second quarter but the recovery appearsrnto have slipped a bit heading into the fourth. rnRising rates are weighing on both the housing rebound and the economy asrna whole and even with the shutdown over and the debt ceiling default averted atrnthe last minute the two issues are not resolved and the economy faces ongoingrnuncertainty.   Freddie Mac’s ChiefrnEconomist Frank E. Nothaftrnand Deputy Chief Leonard Kieferrnask, “Will the economic recoveryrnshutdown, or can we expectrna pickup in economic activityrnany time soon?”</p

The last shutdown, almost 18rnyears ago, consisted of two only months apart. rnThe first in November of 1995 lasted 5 days and furloughed 747,000rnfederal employees.  The following Januaryrnanother lasted three weeks and affected 284,000 employees.  The cost of those shutdowns was estimated atrn0.25 percentage point in economic growth by the Bureau of Economic Analysis andrn0.5 percentage point by the Congressional Budget Office. The shutdown thisrnmonth was projected by Macroeconomic Advisers to reduce growth in the fourth quarter by 0.3rnpercentage point should it last for two weeks. rnIt lasted 17 days.</p

The housing market was alreadyrnbeginning to cool for spring and summer’s strong sales and rising prices.  Mortgage rates rose steadily from Junernthrough September then retreated by 0.3 percentage points in September.  Nothaft and Kiefer say they expect the ratesrnto reverse course again once soon and project they will hover around 4.3rnpercent over the next few months and then head higher in 2014.</p

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Even with rising rates homebuyerrnaffordability will remain high.  Pricesrnare being driven up in many parts of the country by a lack of inventory in thernface of higher demand with the supply of homes at a new post-recession low of 5rnmonths at the end of September. rnAccording to the National Association of Realtors® this was 2 percent abovernthe inventory in September 2012 but closed sales were up 11 percent, drivingrnthe inventory-sales ratio lower.  Inrnthose markets with the most aggressive price increases the inventory-salesrnratio is even tighter.</p

There are three causes of the supply;rnhigh numbers of underwater properties, a decline in distressed sales, and arndepressed level of new home construction. rnCoreLogic estimates that 7.1 million homes or 14.5 percent of allrnmortgaged properties in the country were in negative equity status in thernsecond quarter even as price gains lifted another 2.5 million homeowners intornpositive territory, a pace of improvement that should slow as price growthrnmoderates.  “The high level of underwater households removes an important source of supply of for-salernhomes. Indeed, existingrnhome sales as of the third quarterrnwere still down 26 percentrnfrom their peak in the third quarterrnof 2005.”</p

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Homes with arnseriously delinquent mortgage or in foreclosure have fallen in numbers by aboutrn2.4 million from the peak of 5.1 million in 2010.  As this foreclosure inventory continues to gorndown inventories should tighten further. rn</p

The thirdrnfactor, new home construction, remains severely depressed.  In a normal economy there should be aroundrn1.7 to 1.8 million housing units added each year.  Freddie Mac’s most recent forecastrnanticipates that less than 1 million will be added in 2013 and about 1.15rnmillion in 2014.  “This dearth ofrnbuilding is due to weak (but improving) new home sales, and the inability tornramp up production significantly despite rising demand, the economistsrnsay.  And the inability of homernconstruction to rebound has kept the economy from reaching normal levels ofrneconomic growth. “Construction employment alone is 1 to 2 million belowrntrend levels, which is roughly 1 year of non-farm payroll growth at currentrnlevels.”</p

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“As residential constructionrngets unstuck, the economy should start to get moving.  We are forecasting that the ramping up ofrnresidential construction will take a while, and while economic growth willrnimprove over the next year, we won’t see an economy operating at full potentialrnuntil sometime after 2015.</p

Also key to the housing market isrnthe softening confidence in the economy from both consumers and business.  Consumer confidence has remained lowrnthroughout the recovery  until early thisrnyear but events in Washington are likely to weaken confidence further throughrnthe fourth quarter but should pick back up again next year.</p

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Nothaft added, “Thernhousing recovery keeps chugging along despite a constant barrage of disruptionsrnto the broader economy. We’re likely going to see the housing recovery slowrndown, but not shut down, as we close out the rest of this year due to tightrninventories in many markets, rising mortgage rates and slumping consumerrnconfidence. Fortunately, the housing recovery should continue to absorb therneconomic shocks in stride and improve next year.”

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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