Plumbing and Mechanical

Aug.10, 2007 - Impacts of financial turmoil on construction segments

August 10, 2007

The worsening housing finance market appears likely to have varied impacts on construction. Lenders have tightened credit standards and raised rates for some-but not all-mortgage applicants. Freddie Mac reported that this week’s average interest rates for new 15- and 30-year fixed-rate and 1- and 5-year adjustable-rate mortgages (of up to $417,000 that meet risk and documentation thresholds) were all close to both the week-ago and year-ago rates. The 30-year fixed-rate mortgage averaged 6.59% with an average 0.4 point for the latest week, compared to 6.68% last week and 6.55% a year ago. But prime “jumbo” loans, the Wall Street Journal reported, have rates “as much as 7.25% or 8%. Usually, such loans cost only about a quarter point more than conforming mortgages, but the gap has ballooned to as much as 0.8% during the past week.” These shifts are likely to mean a further downturn in homebuilding and home sales among both affluent borrowers and “nonprime” borrowers. But one type of revenue-generating construction-rental housing-might receive an offsetting boost if rental demand rises from individuals who no longer qualify for home purchases.

A drop in home sales is likely to mean less spending at home improvement, furniture, furnishings, electronics and yard and garden stores as well as less retail construction in conjunction with new housing developments. Retail spending in general, and therefore retail construction, might be impacted more broadly by tighter lending standards or by stock-market declines that reduce consumers’ wealth. The Journal reported, “Collectively, retailers posted a 2.9% increase in July same-store sales, or sales at stores open at least a year, according to an index of 48 major chains compiled by Retail Metrics Inc. [vs. 3.9% a year ago]. Year to date, same-store sales are up 2.8%, a sharp slowdown from the average gain of 3.7% seen in 2006.”

Retail construction could also slow if tighter credit standards mean that some developers no longer qualify for loans. This impact could similarly affect other types of income-producing properties, such as office, warehouse and hotel construction. Office construction might take a hit as well from reduced demand for space from financial-services firms. For instance, American Home Mortgage Inc. laid off 7,000 (mainly office) workers two weeks ago, shortly before declaring bankruptcy. But the office market does not seem to be affected yet. Gary Rosenberger (www.Econoplay.com) reported, “’At this point we’re not seeing anything directly,’ said Ken McCarthy, a managing director at Cushman & Wakefield in New York City, referring to the impact of troubled credit markets on New York City commercial real estate. He saw no signs of retrenchment in the second quarter or in July in New York City or in the national market as a whole. ‘The market remains strong so far, according to the statistics that we keep. We see nothing that suggests weakening demand for office space.’”

Lower home sales and property values mean reduced property-tax and transfer-tax receipts that fuel construction by many school districts, local governments and some states. The Washington Post reported, “Fairfax County [Va.] officials are predicting that the budget shortfall for the coming year could hit $120 million because the slumping real estate market has led to the lowest annual revenue rate increase in 15 years. One casualty could be the school system….Throughout Northern Virginia, local governments are grappling with falling home sales and prices and more foreclosures, which are driving down real estate assessments. About 60% of Fairfax’s revenue comes from real estate taxes.” The BNA Daily Report for Executives reported Aug. 3, “General revenue collections in Florida will decrease by some $1.5 billion over the coming fiscal year, as ongoing trouble in the state’s housing market spills over into other segments of the economy, a panel of state economists said Aug. 1….Specifically, the panel pointed to decreases in sales, documentary stamp, intangibles and corporate income tax collections.” Although officials quoted in the stories did not mention cuts in any particular spending category, construction typically is reduced when revenues fall short of projections.

Personal income growth accelerated in 252 of the nation’s 363 metro areas (MSAs) in 2006, the Bureau of Economic Analysis (BEA) reported. Construction contributed 0.44% of the 6.6% growth in 2006 and 0.34% of the 5.2% growth in 2005. BEA noted, “Construction was particularly robust in the MSAs with the fastest population growth-St. George, Utah; Bend, Ore.; Cape Coral, Fla.; Myrtle Beach, SC; and Baton Rouge, La….The construction sector in the Gulf Coast MSAs recovering from Hurricane Katrina also made substantial contributions to their personal income growth…Most of the MSAs where construction subtracted from personal income growth were in…Michigan, Ohio, Indiana, Illinois and Wisconsin….Most of the MSAs with the fastest per capita personal income growth had a relatively large mining sector (including oil and gas extraction) or a relatively large manufacturing sector that processes petroleum….The growth in the mining sector had ripple effects on other industries in these MSAs, particularly construction. The construction sector contributed at least 2 percentage points to per capital income growth in Odessa and Beaumont, Tex.”