Friday, April 09, 2010

The Housing Bust and Construction Employment

by Calculated Risk on 4/09/2010 02:15:00 PM

Back in 2006 some analysts argued that strong local economies (because of construction) would keep certain areas from being impacted by the housing bust. I disagreed and wrote:

As the housing bubble unwinds, housing related employment will fall; and fall dramatically in areas like the Inland Empire. The more an area is dependent on housing, the larger the negative impact on the local economy will be.

So I think some pundits have it backwards: Instead of a strong local economy keeping housing afloat, I think the bursting housing bubble will significantly impact housing dependent local economies.
Here is an update to one of the graphs I posted in 2006 (data is not seasonally adjusted):

Percent Construction Employment Click on graph for larger image in new window.

This graph shows the percentage of construction payroll jobs in three areas of California: San Diego, Riverside (Inland Empire), and Sacramento. The California percentages exclude the three metropolitan areas.

Sure enough, generally the areas with the largest price declines and total lost jobs, were the areas with the highest percentage of construction employment during the boom. As an example, total employment in the Inland Empire is off 14.3% compared to 10.4% for all of California.

I also took a look at some of the Case-Shiller cities. The next graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices (NSA).

Case-Shiller Price Declines Unfortunately the BLS doesn't break out construction employment for Denver, Dallas or Charlotte (the cities with the smallest Case-Shiller house price declines).

So I compared Boston (4th smallest price decline) with Las Vegas and Phoenix with the largest price declines. I added Texas because of the minimal housing bust in that state.

Percent Construction Employment Sure enough - the cities with the highest level of construction employment were hit the hardest. Boston has a fairly low percentage of construction jobs and a fairly mild bust. In Texas there are a fair number of construction jobs, but there wasn't a huge surge in construction (construction in Texas is probably heavily commercial).

In Las Vegas total employment is down 14.6%, and in Phoenix employment is off 12.9%, but in Boston total employment only declined 7% - and only 4.9% in Texas.

This was all part of the cycle. Rising prices meant more home construction - and more construction meant more construction employment and that meant more homebuyers. When the bust came, many of these workers lost their jobs, and then their homes, and that put additional pressure on the local housing markets. So it was pretty easy to tell in 2006 which areas would get crushed.