Jan 15 2007
Construction Deal, Inc., a top-rated online service that matches contractors to commercial and residential remodeling and construction projects, announced their economic outlook for the construction industry in 2007. After an extended housing boom, the real estate and building industries have slowed to a crawl over the past few quarters. Many experts are predicting the general economic outlook depends heavily on the short term future of the housing market.
While the economy has remained steady, interest rates have been held in check, and unemployment is low, there are still concerns about the effects of the shaky housing market. The Federal Reserve fears an interest rate reduction, which could help real estate sales and boost consumer confidence, could spark runaway inflation. Consumers are worried, as home prices drop and equity diminishes, that they have less money to build, upgrade and relocate, or remodel their existing home.
Despite a healthy economy, consumer confidence is the biggest obstacle to the construction industry. As home prices jumped in the recent housing boom, personal incomes did not keep pace. Unemployment is low but fewer high-paying and quality jobs were added across the board within that same frame. Overall, the current U.S. workforce is more productive than previous generations. But a productive workforce can be bad news for the real estate market; fewer workers mean fewer houses are needed.
The Federal Reserve Chairman, Ben Bernanke, could be the deciding factor on how the U.S. economy performs over the next two years. Bernanke's focus will likely remain on stifling inflation. If the housing market doesn't show signs of life on its own, his policy could create a serious recession by the third and fourth quarters of 2007. If he lowers interest rates to stimulate the housing market, he'll let the economy grow again and inflation could skyrocket. This could hurt the industry as higher prices on materials and labor could have the effect of lowering construction demand.
What has many experts concerned is the U.S. bond market. Bond market pricing has been showing a very high, very flat yield rate, with little or no difference between the 3-month T-Bill and the 10-year bond. Every time this has happened in the past (the early 70's, 1975, the early 80's, early 90's and 2001) the economy has ground to a halt and we were mired in a recession.
In most areas, 2007 housing prices will not drop dramatically but will not appreciate for a minimum of two years. The question is how many people will be hurt by a loss of equity in their homes or a rise in their interest rates? The rash of questionable mortgages and a rise in foreclosure rates will further dampen the housing market. Many jobs are tied to the real estate and construction industries and the loss of jobs could continue to push down economic growth. A low savings rate, higher debt, rising fuel costs, and lowered home equity should keep consumer confidence bogged down. 2007 could be a rough year not only in construction and real estate, but for the country as a whole.
Commercial real estate is the brightest spot in the industry outlook. Commercial vacancy rates are at an all-time low and demand is growing. Office construction and multi-family unit construction should grow in 2007 and 2008. Retail unit demand might suffer if there is an overall economic recession. Because many apartments were converted to condominiums during the real estate boom, there should be an increased demand for apartment construction. If interest rates rise, it will become more affordable to rent than own.