Intended to Provide an Analysis

¶ … intended to provide an analysis of the residential construction industry -- defining the prospects for that industry over the next three years. While, there are numerous variables which could impact such an outlook so that it changes significantly -- including changes to the general economy or tax structure driven by government policy, consumer confidence, the recession and the ongoing financial credit crisis, as well as other possible developments such as natural disasters -- it is possible to formulate a general forecast based on current industry conditions as of January, 2010. Through a brief summary of those current conditions, an outline of expected changes, and a discussion of the implications for growth in the industry both at the macro and company level, this paper will provide such a forecast.

Current conditions

The construction industry was hit very hard, very early in the recession of 2008 and 2009. As the credit crunch began to negatively impact potential buyers' ability to obtain financing, and economic worries generally drove consumers to hold on to money that they may have previously spent on home renovation or construction projects, business prospects began to dry up in many regions of the country by early 2008. Through continuous waves, decreasing expenditures on home renovation, home construction, commercial construction, and industrial construction drove significant losses in business activities and resulted in extensive layoffs of workers. Unemployment in the industry provides one useful way of analyzing the lack of economic activity in the sector. One labor tracking site, for example, indicated that the general employment losses industry-wide amounted to 14%, with carpenters and architects -- the two groups which are perhaps most involved in new residential construction -- seeing losses of 17 to 18% (Cunningham, 2009).

While the Bureau of Labor Statistics points out that "Construction offers more opportunities than most other industries for individuals who want to own and run their own business," (Career Guide to Industries, 2010-11 Edition) this very fact -- that many construction contractors are small business owner-operators -- held several implications for the general state of the industry in its current conditions. First, many of these contractors, when business slowed down, did not have a very large safety net. Many operators generally run small operations with low overhead and are subject to the same credit crisis that their consumers are subject to when they need to buy, for example, new equipment or autos. Second, as workers get laid off in commercial occupations, they often make attempts to find work in the residential market on a temporary basis, so that a labor glut occurs and prices for labor and/or project estimates fall out of necessity with increased competition for the few business opportunities which do exist. This implies more difficulties for workers and owners trying to make ends meet. Finally, the prospects for growth in the industry may be difficult to accurately measure, just as it is difficult to accurately measure with a proper accounting the real status of job losses and lost economic activity in the industry during the slow-down period. Measures such as the officially-reported new-home starts show that, for example, residential construction project which began in November, 2009, were up 8.9% over the same figure for October -- which seems to indicate relative growth -- but that number was down 12.4% from November 2008 (U.S. Census Bureau News, 2009). This means that the industry may in fact be growing at present, but it has a significant way to go before it even reaches the point it was at when the recession began.

Expected Changes in 3-year Outlook

Population growth and infrastructure aging should result in an increased need for housing in the residential construction area. The Bureau of Labor Statistics points out that competition for jobs will likely be fierce for much of this period, giving preference to those with highest skill levels, as a continuing labor glut and financial tightening holds down prices. However, it suggests that employment -- as a proxy for growth -- should increase by 19% by the mid-2010s. There are a number of factors which will impact this potential for growth.

The existence of many foreclosed homes and the continuing sorting of real estate prices, as that related industry comes to stability, will likely impact the prospect for growth in a negative way, as will the renter's market and the general state of the economy. However, government policy, with tax breaks offered for first-time buyers, should aid any prospects for growth. The advent of green technologies may benefit prospects for growth, as higher-income buyers may be more prone to build in order to achieve concerns related to lifestyle as much as physical need. Finally, the government stimulus programs, which are designed in many cases to aid development of construction projects generally, should have positive benefits to the residential construction industry, as the industry begins to shake off its economic woes and settle into a pattern of more normalized economic activity.

Case Study