Historic downturn in home construction - 7-month decline longest on record

Historic downturn in home construction - 7-month decline longest on record
By William Sluis
Copyright © 2006, Chicago Tribune
Published December 2, 2006

A decline in home construction for the seventh month in a row and the first report of shrinkage in manufacturing in nearly four years sent a shiver through financial markets Friday, as analysts expressed concerns that the stumbling real estate and auto industries could drag the country into recession.

A widely watched survey from the Institute for Supply Management showed an index of manufacturing falling to 49.5 in November, behind October's reading of 51.2. A reading below 50 indicates the factory sector is contracting; it had been above 50 since June 2003.

The index was one of two worrisome economic reports that pushed stocks down by triple digits before partly recovering.

The Commerce Department said construction activity in October plummeted by the largest amount since 2001. The seven-month decline in home building, starting in April, was the longest on record.

"Construction spending lost momentum in October," said economist Ken Simonson, of the Associated General Contractors of America.

The Census Bureau said the value of construction outlays in October totaled $1.178 trillion, down 1 percent from a downwardly revised September figure.

"Residential construction spending shrank again in October, by 1.9 percent, bringing the cumulative decline to 10 percent since peaking last March," Simonson said.

"There are too many homes for sale, and some of them are getting stale," said economist Carl Tannenbaum of LaSalle Bank.

Other analysts said cutbacks in the domestic auto industry are hurting broad swaths of manufacturing. Detroit's carmakers have been shedding workers, offering buyouts to members of their unions.

The weak economic numbers indicate the Federal Reserve soon will need to reverse course and lower interest rates, said economist Ian Shepherdson.

"All that's needed now to put the Fed under irresistible pressure is a further downshift in payroll growth and a rise in the unemployment rate. Both are imminent," said Shepherdson, of High Frequency Economics, Valhalla, N.Y.

Meanwhile, a group of Chicago-area builders said Friday that local home construction, which fell by about 7 percent this year, will drop by another 3 percent in 2007. However, it will hold at levels of 2003, they said.

The builders, at a conference in Oakbrook Terrace, said gloom about real estate sales has been overblown.

Developers plan to create about 36,000 units of new housing in the Chicago area next year, down from a peak of 40,000 units in 2005, those at the session were told.

For now, builders are growing eager to raise prices. That means incentives, including price cuts, free upgrades and special mortgage deals, will be harder to find.

The price cuts that have hit home construction are similar to those afflicting the auto industry, said Robert Shield of Wells Fargo Home Mortgage in Naperville.

"Detroit started offering steep discounts and got into a situation from which the carmakers couldn't escape," Shield said.

While home builders have been offering deep price cuts, 3.99 percent financing for a year and deals that offer no payments for six months or more, such a situation is temporary, said builder Patrick Curran of West Point Builders, which is selling homes in Elgin.

"It is a question of having had too much inventory. However, not many builders still have large numbers of unsold homes," Curran said.

"A few builders have needed massive discounts to sell houses and found themselves in a desperate situation," said Robert Meyn of Ryland Homes, with local offices in West Dundee.

Because of rising costs for land, material and labor, such discounting is coming to an end, Meyn said.

In recent months, sales have been slow because of an overhang of existing houses. The number of listings in the Chicago area has risen by 30 percent to 35 percent from a year ago, he said.

"Gone are the days when you could put any house on the market and sell it quickly," said builder Chris Naatz of the Dell Webb unit of Pulte Homes, with offices in Elgin.

At one point, Meyn said, "there was a frenzied investor mindset, driven by rapid home price appreciation. That is gone. There is a more realistic approach to pricing."

To help buyers overcome worries about selling the house in which they are living, several of the builders said they are providing help in the selection of real estate agents, focusing on those who can move houses quickly.

Giving a boost to the local housing market, according to the builders, have been two trends: a growing job market and continued arrivals of immigrants.

Builder John Carroll told session participants that the construction industry has been helped by a large number of jobs being created in office corridors rising near outlying expressways and toll roads.

"The center of the circle for jobs and housing has moved farther from Chicago," he said.

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wsluis@tribune.com