Fortunately, there are few ready mixed concrete producers left in the country who are not feeling the positive effects of surging new home starts. More than a few are struggling to keep up with demand this summer and fall, as some markets that fell far are bouncing back faster and stronger than anyone would have predicted. But while the housing market may finally be on the mend, it has yet to move the overall economy’s needle.
Those expecting a quick return to the cycle of rising prices, home sales, and housing construction that feeds further consumer spending will have to wait, according to a widely circulated financial research report. The strategists who did the research outline four primary factors that could restrain the housing sector’s ability to boost the economy.
Manpower and equipment reductions have left the industry stretched thin. While builders started construction on 780,000 units last year (28% more than 2011) construction still needs to double to keep up with population and household growth. The speed with which construction grows could depend on its ability to overcome capacity constraints.
The housing crash caused the scaling back of capital equipment, coupled with a contraction in the labor pool, as employees left the workforce or re-trained in other industries. The construction labor force is now smaller than it has been since 2000, and it is unclear whether large pools of skilled labor can be easily tapped to build even historical averages of 1.2 million units annually. Further, the downturn disrupted the process of entitlement and permitting of vacant land, posing challenges to large-scale homebuilders.
Banks have to expand credit beyond today’s conservative standards. Ironically, rising rates could help because that will dry up the gravy train of refinancing that has kept mortgage lenders well-fed over the past two years. With less refinance business, banks will have greater incentives to compete for new loans and will ease their standards.
Consumers have to feel confident enough to borrow. The report points out that, because government spending cuts will further crimp spending, any tangible impact from reduced savings will likely come from earners in the top 40%, who are also more likely to be homeowners and hold over 70% of consumer credit.
Mortgage-equity withdrawal isn’t likely to fuel consumer spending as much as it did during the past decade. This is true because lending standards are more conservative today, and also because homeowners taking cash out of their homes was an aberration during the heyday of the housing boom. Remember, rising home values are, for now, simply restoring lost equity and not creating new wealth. During 2012, homeowners extracted around $65 billion from their homes—far less than the $209 billion that was extinguished either through amortization or default.
So despite reasons for being optimistic about housing, its effects on stimulating consumption and economic growth will take time. The connection between home prices and spending depends on lending growth, which is likely to stay subdued as bankers slowly rebuild their confidence. In the meantime, new housing starts will help propel improved volume in our industry, hopefully continuing its march toward the pre-recession highs.