Real Estate and Construction

Last week’s news on housing and commercial real estate was all bad. On the residential side,

• New home sales fell to an adjusted annual rate of 300,000, a new all-time record.
• The builder confidence index declined sharply in June.
• Existing home sales fell in May.
• 7.3 million mortgages are delinquent.
• 11.2 million homeowners now have negative equity in their homes.

Those facts, coupled with an existing supply of 3.89 million homes for sale and a large shadow inventory of houses sitting on banks’ balance sheets that have been foreclosed on and not yet put back on the market, are strong evidence that the outlook for home prices is bleak, and will probably remain so into 2011 and maybe 2012. This will also be a serious drag on the economy.

On the commercial side, AIA architecture billings declined in May. This index is a leading indicator for commercial real estate construction and investment. There is usually a lag time of approximately nine to twelve months between architecture billings and construction spending. So it is fairly obvious that commercial construction is not going to increase this year and probably not next year either. Then there is the existing supply of empty commercial real estate already on the market and the rising foreclosure rate for commercial mortgages which puts a stress on banks’ balance sheets that have a large number of commercial real estate mortgages on their books, and the greatest exposure to this risk is community banks which is where much of the small business lending is done.

This whole picture of all the components of the real estate and construction industries constitutes a major barrier to any economic recovery, and that barrier is going to be slow to come down because of the stubbornly high unemployment rate. And the rising sentiment in Washington against stimulus and toward deficit reduction could hinder job growth to some extent which would then make it harder still to bring the unemployment rate down. Like it or not, government stimulus has worked in some instances, and the housing market is an excellent example. Before the $8,000 tax credit expired, home sales were doing well. The credit has now expired and the bottom has dropped out of the housing market.