Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold Mining Stocks: A House Built on Shaky Ground - 9th Apr 21
Stock Market On the Verge of a Pullback - 9th Apr 21
What Is Bitcoin Unlimited? - 9th Apr 21
Most Money Managers Gamble With Your Money - 9th Apr 21
Top 5 Evolving Trends For Mobile Casinos - 9th Apr 21
Top 5 AI Tech Stocks Investing 2021 Analysis - 8th Apr 21
Dow Stock Market Trend Forecast 2021 - Crash or Continuing Bull Run? - 8th Apr 21
Don’t Be Fooled by the Stock Market Rally - 8th Apr 21
Gold and Latin: Twin Pillars of Western Rejuvenation - 8th Apr 21
Stronger US Dollar Reacts To Global Market Concerns – Which ETFs Will Benefit? Part II - 8th Apr 21
You're invited: Spot the Next BIG Move in Oil, Gas, Energy ETFs - 8th Apr 21
Ladies and Gentlemen, Mr US Dollar is Back - 8th Apr 21
Stock Market New S&P 500 Highs or Metals Rising? - 8th Apr 21
Microsoft AI Azure Cloud Computing Driving Tech Giant Profits - 7th Apr 21
Amazon Tech Stock PRIMEDAY SALE- 7th Apr 21
The US has Metals Problem - Lithium, Graphite, Copper, Nickel Supplies - 7th Apr 21
Yes, the Fed Will Cover Biden’s $4 Trillion Deficit - 7th Apr 21
S&P 500 Fireworks and Gold Going Stronger - 7th Apr 21
Stock Market Perceived Vs. Actual Risks: The Key To Success - 7th Apr 21
Investing in Google Deep Mind AI 2021 (Alphabet) - 6th Apr 21
Which ETFs Will Benefit As A Stronger US Dollar Reacts To Global Market Concerns - 6th Apr 21
Staying Out of the Red: Financial Tips for Kent Homeowners - 6th Apr 21
Stock Market Pushing Higher - 6th Apr 21
Inflation Fears Rise on Biden’s $3.9 TRILLION in Deficit Spending - 6th Apr 21
Editing and Rendering Videos Whilst Background Crypto Mining Bitcoins with NiceHash, Davinci Resolve - 5th Apr 21
Why the Financial Gurus Are WRONG About Gold - 5th Apr 21
Will Biden’s Infrastructure Plan Rebuild Gold? - 5th Apr 21
Stocks All Time Highs and Gold Double Bottom - 5th Apr 21
All Tech Stocks Revolve Around This Disruptor - 5th Apr 21
Silver $100 Price Ahead - 4th Apr 21
Is Astra Zeneca Vaccine Safe? Risk of Blood Clots and What Side Effects During 8 Days After Jab - 4th Apr 21
Are Premium Bonds A Good Investment in 2021 vs Savings, AI Stocks and Housing Alternatives - 4th Apr 21
Penny Stocks Hit $2 Trillion - The Real Story Behind This "Road to Riches" Scheme - 4th Apr 21
Should Stock Markets Fear Inflation or Deflation? - 4th Apr 21
Dow Stock Market Trend Forecast 2021 - 3rd Apr 21
Gold Price Just Can’t Seem to Breakout - 3rd Apr 21
Stocks, Gold and the Troubling Yields - 3rd Apr 21
What can you buy with cryptocurrencies?- 3rd Apr 21
What a Long and Not so Strange Trip it’s Been for the Gold Mining Stocks - 2nd Apr 21
WD My Book DUO 28tb Unboxing - What Drives Inside the Enclosure, Reds or Blues Review - 2nd Apr 21
Markets, Mayhem and Elliott Waves - 2nd Apr 21
Gold And US Dollar Hegemony - 2nd Apr 21
What Biden’s Big Infrastructure Push Means for Silver Price - 2nd Apr 21
Stock Market Support Near $14,358 On Transportation Index Suggests Rally Will Continue - 2nd Apr 21
Crypto Mine Bitcoin With Your Gaming PC - How Much Profit after 3 Weeks with NiceHash, RTX 3080 GPU - 2nd Apr 21
UK Lockdowns Ending As Europe Continues to Die, Sweet Child O' Mine 2021 Post Pandemic Hope - 2nd Apr 21
A Climbing USDX Means Gold Investors Should Care - 1st Apr 21
How To Spot Market Boom and Bust Cycles - 1st Apr 21
What Could Slay the Stock & Gold Bulls - 1st Apr 21
Precious Metals Mining Stocks Setting Up For A Breakout Rally – Wait For Confirmation - 1st Apr 21
Fed: “We’re Not Going to Take This Punchbowl Away” - 1st Apr 21
Mining Bitcoin On My Desktop PC For 3 Weeks - How Much Crypto Profit Using RTX 3080 on NiceHash - 31st Mar 21
INFLATION - Wage Slaves vs Gold Owners - 31st Mar 21
Why It‘s Reasonable to Be Bullish Stocks and Gold - 31st Mar 21
How To Be Eligible For An E-Transfer Payday Loan? - 31st Mar 21
eXcentral Review – Trade CFDs with a Customer-Centric Broker - 31st Mar 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

United States Construction Industry in Death Spiral

Economics / Recession 2008 - 2010 Jun 16, 2010 - 02:51 PM GMT

By: JD_Rosendahl


Best Financial Markets Analysis ArticleHow bad are things in the construction industry? Worse than many really know as Housing Starts in U.S. Fell to a 593,000 Pace in May

June 16 (Bloomberg) -- Builders broke ground on fewer U.S. homes in May than anticipated after the expiration of a government incentive.

Housing starts fell 10 percent, the biggest decline since March 2009, to a 593,000 annual rate, from a revised 659,000 pace in April that was less than previously estimated, Commerce Department figures showed today in Washington. Building permits, a sign of future construction, unexpectedly fell to a one-year low. Single-family starts suffered the largest drop since 1991.

Construction of single-family houses slumped 17 percent, the biggest drop since January 1991, to a 468,000 pace in May. Permits declined 9.9 percent after a 10 percent drop in April. Work on multifamily homes, such as townhouses and apartment buildings, jumped 33 percent to an annual rate of 125,000.

Last Monday I had coffee with a client. He's a sub-contractor with gross revenues down from $20 million at the peak to something between $5-8 million currently. He's had to trim staff from 200 plus to something less than 50 and keep a lot of other employees on call to keep costs down.

We were discussing his business and the industry.   He said, "The construction industry has been, and still is, in a death spiral." He voiced some interesting concerns why the industry is still headed the wrong way.

Financing: He said, "There's new business ready to go with projects to be built, but no one can get construction financing to get these new projects going. Even large publicly traded companies are finding it hard to get construction loans."

He's absolutely correct. Getting a construction loan is next to impossible. Construction lending is one of the lending areas that got so many banks shut down by the FDIC. Banks have no desire in this world to finance a new building if the loan payoff is tied to the speculative sale of units or lease up of space.

There's too much inventory for sale or lease.  No bank wants to end up owning a building in this environment. 

There's too much risk in hoping a building project will eventually sell units or lease out units, and payoff the construction loan. Only the most AAA projects and platinum of borrowers with large cash equity in a project will get construction financing. Those situations today are indeed rare. Yes, bank lending standards are impacting the construction world intensely.

Second: He then said, "Real estate is still not moving, which is impacting the industry." He discussed a particular large condo project he's been working on for years that shut down in the middle of the project as the owner went out of business and the bank now owns the project. In this project, only 3 of the 7 large condo towers have been completed. The remainder of the project is on hold because they can't sell units.  At the peak, these condo units were supposed to sell for $700,000.  Now existing units list for sale at $280,000 and they still aren't moving.

Again, this is one of the reasons banks have little to no appetite to lending. If an investor or developer can't sell real estate, then neither will the bank if they own it. Banks aren't interested in the speculative risk of selling real estate. They are more likely to finance smaller owner occupied real estate to very strong clients.

Lastly: He said, "There are many competitors that have closed shops, or scaled so far back they are barely in business, and many hang by a thread of survival.

We've already seen contractors and sub-contractors go out of business mostly due to a contraction coupled with too much debt.  There's another wave of contractors on the verge of failing and going out of business because there's not enough business, and they've had a hard time scaling back expenses as fast as the contraction in business.

As long as real estate sales and financing remain in the current status, I can't imagine how improvement will come to the industry because real estate sales and financing are what keep the pulse of the business going.

Absolutely, the construction industry is in a death spiral. It will force more companies within the industry to close. It will force wages to decline within the industry (wage deflation), so those remaining companies can remain competitive and obtain the little work that does exist and turn a profit. Profit being the only reason to be in business, otherwise you're just wasting time and capital.

The industry shows no signs of improving. The construction industry is a leading indicator of economic health. Given the death spiral, why would anyone believe in the nascent recovery?

Hope all is well.

By J.D. Rosendahl

J.D. Rosendahl was a former stock broker/investment consultant (currently not licensed) before becoming a Commercial Banker for the past 14 years. He manages his family's wealth, helping them avoid the high tech bubble and the real estate bubble melt downs and preserving wealth.

© 2010 Copyright J.D. Rosendahl - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules