Residential construction industry prospects through 2010

¶ … 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.

Case Study

One way to measure the prospects for growth in the residential construction market is to look at suppliers. Since many operators in the industry are small actors, and their prospects may be different from large contractor firms, it makes sense to view the companies that supply all contractors to see how they are faring, and how they are expected to fare, in order to get a view of the industry as a whole. The Home Depot is among the most important of all such suppliers. When viewing the Home Depot's stock prices, it can be seen that the company's stock prices were at $60 per share and above during the period of company expansion prior to 2000. Following a construction recession in the early 2000s, the stock prices fell back closer to the $40 mark, where they stayed for most of the 2000s. In the recent recession, they fell to lows near $18 per share in late 2008, and have slowly climbed back to a current level of just under $30 per share. Since the stock market generally has also begun to climb back to a normalized, status quo level, if is difficult to say that all of this growth is due to expected continued growth in the industry. However, this move is consistent with the points made above -- that the industry has need to grow significantly just to get back to where it was before the recession. Once this, occurs, the residential construction market ought to find stability and begin to promote slow steady growth that is determined less by macro-economic turmoil and more by demographic changes conducive to growth generally.