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Tuesday, December 11, 2012

Merrill Lynch on Housing and Construction Employment

by Calculated Risk on 12/11/2012 07:17:00 PM

We are still waiting for a strong increase in construction employment, but we know it is coming (I expect construction employment will be revised up in the annual revision).

Michelle Meyer at Merrill Lynch wrote about this today (and more on housing): The housing market in 2013

We believe 2012 will go down in history as a year of transition for the housing market. Housing starts are on track to be up 25% and home prices are set to rise 5% over 2012. We believe the recovery will continue into 2013 for several reasons. Most importantly, household formation has started to turn higher, reflecting the shortfall of household creation over the prior five years. In addition, listed inventory is low, owing to extraordinarily slow construction and only a gradual reduction of the distressed pipeline. And specifically for prices, there has been a shift toward short sales as a means of disposing distressed properties. Moreover, investor demand is strong, particularly for distressed inventory.

We forecast housing starts to increase another 25% to an average of 975,000 and home prices to increase 3% in 2013.
The housing market is turning into an engine of growth once again. Housing construction will likely add 0.3pp to GDP growth in 2012 and 0.4pp to 2013 growth. ... The gain in homebuilding will support related sectors such as furniture, building material sales and financial companies. Moreover, construction jobs will finally come back, allowing some of the 2 million people who lost construction jobs to find employment in the field again.

There will also be a jolt to the economy from the gain in home prices. An increase in home values lifts household net worth and boosts consumer confidence. If consumers perceive the gain in wealth to be permanent, they will increase their current consumption. But the rise in home prices can do something even more vital for the economy – it can spur credit creation, which then fuels housing demand and reinforces the gain in home prices. We are seeing the very early stages of a positive feedback loop between the housing market, credit market and real economy, which can be quite powerful in time.
I've wrote about the positive impact of prices early this year, see The economic impact of stabilizing house prices?
We are probably already seeing the impact of stabilizing prices on housing inventory. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient. I think we are seeing that right now.

More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker. And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand.

And this demand will also boost homebuilding and new home sales – since homebuilders will have a better idea of the pricing needed to compete in a market (falling prices makes it hard to plan).
And on construction employment: Back to work we go
There are several ways that the recovery in the housing market multiplies through the economy. One of the key channels is to create jobs in the construction industry and related fields. However, despite the 25% gain in housing starts this year, the construction sector has not added workers. Looking back at prior cycles, it appears that it is normal for construction jobs to lag output by about a year. We think we are on the verge of construction hiring.
As demand for housing continues to improve, construction companies will likely become more comfortable expanding their workforce. In addition, construction workers do not just focus on new construction; they can also find employment for renovations. Renovation spending has been on the rise and will likely receive a boost from Hurricane Sandy rebuilding. We think the future looks brighter for construction workers.
I also expect a pickup in construction employment in 2013.