Economist Provides Economic and Construction Outlook
October 22, 2010

Over the past six months the construction market has continued to struggle. In a recent webcast Jim Haughey, chief economist for Reed Construction Data, provided a forecast of what’s been happening in the market since May, as well as some of what we can expect in the coming months and into next year.

He pointed out that in six months GDP recovery has been at a slow pace; nonresidential public construction has fallen sharply; the new housing market saw a recovery surge, but quickly retreated; and existing homes sales dropped to a record low “as a consequence of the expiration of the tax credit and the problem with home foreclosures is still a part of the outlook.”

Haughey also said credit continues to be a problem.

“As low as rates are, a lot of people still cannot get credit--and it doesn’t matter what the rate is if you can’t get it or your banker doesn’t have it,” he said.

Speaking of construction material prices, he added that they have moderated a bit in the last few months.
“Generally, import prices are up and domestic prices are down and that will be the trend for at least a number of months ahead.”

Taking a closer look at the credit market, Haughey pointed out that overall in the economy there is an adequate surplus of available funds.

“The economy is quite weak and the Federal Reserve and other federal entities have been pouring money into [it] and that’s what gives us a very low interest rate,” he said. “None the less, a large share of potential borrowers lacks the higher equity share now required.” He explained that typically, when times are good, commercial developers put up 20 percent of the anticipated price of the development and the banker would provide the balance. Now those requests are 40 percent.

“Higher credit scores are also required for individuals to buy a house and there is much more scrutiny for business borrowers as well,” said Haughey. “Income prospects in a sluggish economy are not as good as the bankers would like to see, even if you have the money and even if your credit is good, because they don’t think your project or job will generate enough cash flow to pay the loan back.” He said this can be a particularly difficult problem for some borrowers.

“Most homeowners and a lot of small contractors and developers borrow from regional and local lenders and many of these have no money at all available for real estate loans,” said Haughey. “Generally, the larger banks have been able to re-capitalize; they’ve gotten money from the Middle East, China or Japan. In the case of many smaller lenders, no re-capitalization is taking place and they are carrying a huge excess of bad real estate loans.”
Looking at the overall economy, he pointed out the economy has seen GDP growth slip to about a 2-percent pace, probably through the end of next year. Haughey expects it will pick up a little more after that--2.3 percent growth next year and 3 percent plus by the latter part of 2012.

“By any definition this is a sluggish recovery … sluggish, but still sustainable,” he said.

He also pointed out that public construction funds will be declining in 2010-11, followed by slow growth for several years.

“As far as construction costs, domestic prices will continue to slip in 2011; import prices are steady, but will resume rising soon,” he said.

As far as total construction spending, this, he said, is near the bottom, which will probably be the end of this year or start of next year.

“We’re anticipating this year construction spending will be down about 10 percent and up about 5 percent next year. It should be up 12-13 percent in 2012. This is about a year late compared to what happened in most economic recoveries,” said Haughey.

Regarding housing starts, from early 2009 up to mid 2011 the numbers have been about the same—a flat period and very depressed level.

“At the tail end this year and beginning of next year we expect a rapid pick up in that,” said Haughey.

As far as other starts, he said there are opportunities and problems. Hotels, for example, are up—57 percent.
“Hotels are still a depressed market but they are on their way back. Multi-family has picked up (44 percent), in part because of the tax credits for condos. Single-family market, though is still down, 9 percent.”

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