Friday, July 28, 2006

Residential Investment Slump: We Ain't Seen Nothin' Yet

by Calculated Risk on 7/28/2006 10:09:00 PM

Click on graph for larger image.

This graph shows annual Residential Investment, in 2000 dollars, since 1976.

2006 is an average of the first two quarters.

In the previous post, I graphed quarterly Residential Investment as a percent of GDP since 1987. This graph shows a decline over the last two quarters, but if this decline in Residential Investment is similar to the previous busts (early '80s and early '90s) then ...

We ain't seen nothing yet!

The early '80s and early 90's busts saw declines of 40% and 25% in Residential Investment respectively. So far, the current decline is about 2% from the quarterly peak of 2005.

Also, it appear residential construction employment closely follows real residential investment with a several quarter lag. If residential investment continues to fall (very likely), then residential construction employment should start decreasing in the 2nd half of 2006. Unfortunately the data series are limited - the data series for residential building started in 1985 and residential specialty contractors in 2001.

Currently there are 3.323 million people employed in residential construction in the U.S. according to the BLS. If the current bust is similar to previous Residential Investment busts, reported residential construction employment might decrease by 800K to 1.3 Million over several years. Actual employment will probably fall even more if there is a substantial underground "cash" economy involved in construction - something I think is likely.

And this is just the impact on residential construction employment. Add in the employment impact on mortgage brokers, RE agents, escrow and title workers, and peripheral employment (like Home Depot, building suppliers, etc.) and the drag on employment over the next few years could be substantial.

Also many of these housing related jobs are relatively high paying with low education requirements, therefore the current job holders might have difficultly finding new jobs with similar pay.

And I haven't even addressed the impact on the consumer from the loss of MEW.