Wednesday, June 19, 2013

Residential construction recovery has a long way to go

New housing construction in the US has increased substantially since the lows of the Great Recession, but remains near pre-recession lows.

Given the population growth since the recession, improvements in household formation, cheap mortgages, and relatively high rent, one would expect construction to be significantly stronger. Even if households can't afford to buy a new home, they need a place to rent. That means someone should be building a rental unit.

Something is holding back construction. Anecdotal evidence suggests that local and regional banks who used to fund residential construction are still holding back. In fact hundreds of banks who used to be in that businesses have been shut down by the FDIC because the construction firms they financed magically "disappeared" in 2008. And those banks that are still around seem to be rather gun-shy, as memories of the great real estate bubble are still fresh on credit officers' minds. When it comes to housing developments, unless you are Toll Brothers, financing is not easy to come by.

With financing tough to come by, while we've seen improvements in residential construction spending, it is still at 1998 levels.

And hiring in residential construction remains anemic.

People point to strong outperformance by homebuilders vs. the broader market since early 2012. That is true - many larger construction firms have seen their earnings increase sharply. But consider the fact that since the beginning of the housing recession in 2006, homebuilder shares are still lagging the S&P500 by over 60%.

Source: Ycharts

The original enthusiasm for residential construction growth has moderated somewhat. One can see it for example in the recent relative weakness in lumber futures. While prices are significantly higher than the 2011 levels, we have witnessed quite a correction lately.

Source: Barchart

Residential construction has a long way to go to see full recovery - even to the "pre-bubble" years.
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