Down We Go

That chart's via Brad DeLong. Certainly isn't a good time to be in the construction business. In principle, things should all rebalance -- as the dollar falls, net exports rise, and employment shifts out of the construction sector and into exporting or import-competing sectors and the trade deficit narrows. But in the meantime, the friction imposes great hardship on folks who lose their jobs and need to find new ones.

I suppose you could say the good news here is that a very sharp decline in new construction is the scenario most consistent with prices for existing homes not collapsing. The population is going to continue to grow, after all.

Comments

The population is going to continue to grow, after all.

I'll feel more confident about that in December, after we get this crew out of the Oval Office.

Posted by Ted | April 17, 2008 9:05 AM

1) What's interesting is looking at the shitload of money being QUIETLY pulled out of the Federal Reserve vault by the banks and --now-- the investment banks. Roughly $150 BILLION since the first of the year, by my count.

See http://www.federalreserve.gov/releases/H3/Current/ --notice the April figure. What you do to get the amount borrowed from the FED is take column 1 (Total) and subtract column 2 (Nonborrowed)--see footnote 3.

2) For some reason, ABC's Charlie Gibson didn't ask about that last night during his long, blowhard questioning session.

Of course, NOT asking the wrong questions is how Charlie makes sure his income doesn't fall down into that grubby region of $250,000 per year. That would be the ghetto for Charlie.

Posted by Don Williams | April 17, 2008 9:21 AM

It's going to be worse than your 'friction' line indicates. One of those frictions is distribution, those sunbelt boom towns are host to a disproptionate amount residential building, in Phoenix it's as much as 10% of the economy. Those laid off workers are going to create a vicious cycle in local housing market for some time before this unwinds.

True the reduction in starts is the only correct response to the rather obvious pricing signals, but the 'friction,'as one says, is going to be considerable

Posted by AJ | April 17, 2008 9:31 AM

Re "Those laid off workers are going to create a vicious cycle in local housing market for some time before this unwinds "
------------
There's also the multiplier effect on local businesses -- laid off workers don't have the money to buy from local merchants, so those merchants take a hit as well. I suspect Walmart is going to suffer as well as Home Depot and Ford/GM.

Posted by Don Williams | April 17, 2008 9:37 AM

When DeLong can actually name some export industries that will increase is the time to take his predictions seriously.

Posted by Tim H. | April 17, 2008 9:38 AM

And of course, those are housing *starts*, which probably should have started scaling back long ago. A lot of those units that were breaking ground back at the high point in 2006 are coming on the market now with the traditional spring real estate inventory roll out.

And we'll have a bunch of adjustable rate mortgages resetting in May...

Posted by Toady | April 17, 2008 9:41 AM

Re Tim's comment "When DeLong can actually name some export industries that will increase "
----------
1) Well, investment capital certainly seems to be flowing out. In part because investors would now rather receive their profits in Polynesian sea shells than in dollars.

Plus, given the $10 Trillion debt run up by the Republicans, they kinda suspect tax cuts in the USA aren't in the offing.

2) Bush's IOUs (US Treasuries) are being exported as well, although there seems to be fire sale in progress on that product.

Posted by Don Williams | April 17, 2008 9:49 AM

Yeah, it isn't going to be pretty. Construction provides a lot of skilled and semi-skilled work that can't be sent overseas, something that is extremely important to American workers right now. With it tanking, there's going to be a lot of people looking for other work, just as the economy is least able to handle it.

Posted by Demosthenes | April 17, 2008 9:52 AM

Re "The population is going to continue to grow, after all."
------------
Well, only in the Roman Empire style.

In which the natives of the USA slowly become extinct (because their relentless slide from the middle class into poverty means they can't afford to raise children).

Thus, the population becomes more and more made of up cheap foreign labor imported by the patrician class.

Posted by Don Williams | April 17, 2008 9:57 AM

The IMF is telling member nations to increase domestic spending. Why?

If you want capital investment to flow to your country you better put the cost burden on the backs of your tax payers.

The banks aren't really sure what to do either. They see ZERO prospect for all these nations to suddenly increase their spending which will have to be supported by increased taxation.

Furthermore, there are new rules established every day that are altering the course of capital markets. Ones and zeros traveling at light speed are not a finite resource such as fossil fuels or copper.

Posted by Gabriel Sutherland | April 17, 2008 10:02 AM

I suspect Walmart is going to suffer as well as Home Depot and Ford/GM.

Wallyworld will actually do pretty well relatively speaking. They'll get all the people who can no longer afford to shop at the mid-range stores.

Posted by daveNYC | April 17, 2008 10:04 AM

From the chart, it looks as though we had a similar housing crash in '80, and one before that in '74-75.

They both were followed by equally sharp upswings, so perhaps there's room for hope after all.

Posted by heedless | April 17, 2008 10:15 AM

A lot of those units that were breaking ground back at the high point in 2006 are coming on the market now

What? When we built, we broke ground on Valentine's Day and moved in in May. Same year. A little over 12 weeks.

With crap weather. And hit or miss crews.

Posted by Jeffrey Davis | April 17, 2008 10:18 AM

In my city and many others a great deal of both residential and commercial construction is performed by otherwise unskilled day laborers. Most are of Hispanic descent. I'll assume many of the more reputable builders do the proper screening for citizenship but nevertheless I'm betting many of the workers are illegal (not that I give a damn). A great many of these workers don't speak English. Now, with such a precipitous drop in construction what are these people going to do? They're not going back to Mexico or wherever else they've come from. For many their employment prospects are dim. A life of crime? On to the public dole? What becomes of them? This is not an unimportant question and I don't hear anyone addressing it.

Posted by steve duncan | April 17, 2008 10:33 AM

When DeLong can actually name some export industries that will increase is the time to take his predictions seriously.

I don't understand what this means. America is a net exporter of healthcare products, certain technology sectors like semiconductors, and capital goods such as aircraft. The US exported $1.2 trillion dollars of goods in 2007, and exports are up over 25% in Jan-Feb 2008 vs. Jan-Feb 2007.

I suppose you could say the good news here is that a very sharp decline in new construction is the scenario most consistent with prices for existing homes not collapsing. The population is going to continue to grow, after all.

In the long run, sure. But we may have a long way to wait until housing stock back comes in line with historical vacancy rates.

Posted by right | April 17, 2008 10:42 AM

Housing prices need to fall in many areas of the country. In the LA area, for instance, it's simply not possible for someone like a teacher, or college professor, or firefighter, or a policeman/woman never will be able to buy a house (or at least would not have been able to do so in 2005). This problem isn't restricted to LA, of course. But they do need to fall so that the middle class can afford homes. This will hurt some people. But it will help many more (so long as prices don't drop incredibly quickly).

Posted by MattD | April 17, 2008 10:55 AM

Re "I don't understand what this means. America is a net exporter of healthcare products ..."
----------------
Yes, and we've been running HUNDREDS of $BILLIONs in trade deficits for years. This year's deficit's running around $700 Billion.
See http://www.americaneconomicalert.org/ticker_home.asp

Which means we've been buying way more than we've been selling and charging the difference to our credit card. What happens when that stops?

Oh, but the "magic of the market" will work? Well, Ask Argentina how pleasant it is to have the global financial market "adjust" a crowbar in your butt.

Via the USA's UNQUESTIONING adoption of globalization ,we now have interdependent supply chains from here to Timbuktu. Which means we can't easily halt import of subcomponents just because they have gotten greatly more expensive.

Just as no one can insulate themselves from the cost of oil --because they must buy gasoline and must buy products which have to be transported to the point of sale.

So most Americans will grow inevitably poorer -- we will have to spend more of our devalued dollars on vastly more expensive goods. Which means we either get less or we become poorer by taking on more debt.

Read 'em and weep, Rubes.

Posted by Don Williams | April 17, 2008 11:08 AM

What? When we built, we broke ground on Valentine's Day and moved in in May. Same year. A little over 12 weeks.

With crap weather. And hit or miss crews.

If you got a home built in 12 weeks, you didn't have a hit-or-miss crew. You had an extraordinarily efficient crew. You should call the contractor and thank him (or her).

The average construction time for an individual SFR is 8 to 9 months. The overwhelming majority of housing starts in this country are large-scale developments, where crews are working on multiple units at once, thus slowing individual construction times. Also factor in a significant number of urban residential high-rises, which take, on average, three to four years to complete.

Posted by Toady | April 17, 2008 11:57 AM

1) What's interesting is looking at the shitload of money being QUIETLY pulled out of the Federal Reserve vault by the banks and --now-- the investment banks. Roughly $150 BILLION since the first of the year, by my count.

"Quietly" in the sense of being reported on the Fed website and being widely reported on in the financial press, and even breathlessly covered on CNBC?

Posted by Tom | April 17, 2008 1:21 PM

They're not going back to Mexico or wherever else they've come from.

Is their capital? The human that controls the capital doesn't have to send themselves home with their capital.

All the US banks are eager to get their hands on this capital flow. They have done everything in their power to capture this market. Why? Greater lending power in Mexico.

Follow the money doesn't have to be restricted to the flow of humans.

Posted by Gabriel Sutherland | April 17, 2008 2:57 PM

Don Williams: Do you blog anywhere? If not, you should. If you do, link me or email me.

Thank you.

Posted by Gabriel Sutherland | April 17, 2008 3:02 PM

Re Tom's comment ""Quietly" in the sense of being reported on the Fed website and being widely reported on in the financial press, and even breathlessly covered on CNBC?"
------------
Citations??

I think it's quiet when Bush and Fed hands $150 BILLION to superrich bankers and there's no mention of it on the front pages of the Washington Post, NY Times or the TV networks.

Yes -- they spoke of the Bear Sterns bailout and of the investment banks being able to "borrow" money. (Translations: "Borrow" = Dump a pile of worthless shit that they can't sell off onto the
taxpayers and take in return $Billions of cash.)

But I haven't seen PUBLIC announcements of the huges AMOUNTS of money being taken out the back door. But maybe I need to get out more.

Maybe Tom can support his snark with some actual references.

When I checked CNBC, for example, I get this story about how the FED says we need to let the bankers "borrow" for at least 6 more months. But the CNBC reporter seems very careful to NOT mention just has much has already been "borrowed".
http://www.cnbc.com/id/24182146/

In my opinion, a classic example of how the US News Media lies by omission.

Posted by Don Williams | April 17, 2008 3:43 PM

Yes, and we've been running HUNDREDS of $BILLIONs in trade deficits for years. This year's deficit's running around $700 Billion....

Which means we've been buying way more than we've been selling and charging the difference to our credit card. What happens when that stops?

Why would it stop? All we're talking about is imports declining as they become marginally more expensive, and exports increasing as they become marginally cheaper. Easy on the apocalypse there.

Posted by right | April 17, 2008 3:46 PM

I think it's quiet when Bush and Fed hands $150 BILLION to superrich bankers and there's no mention of it on the front pages of the Washington Post, NY Times or the TV networks.

This story was on the front page of the New York Times. The number $200 billion is in the second paragraph.

Despite your conspiracy-ranting, there is a difference between "giving" $200B and "loaning" $200B, and if you don't know that I shudder to think what your personal finances look like.

Posted by right | April 17, 2008 3:59 PM

Re right's comment "Why would it stop? "
------------
You got a point. After all, this Bush Prosperity has been based on Bush borrowing $5 Trillion and buying all his rich buddies drinks. We can always borrow another $5 Trillion, right?

Get the Chinese to chip in another $1 Trillion. Maybe EU and Japan another $1 Trillion. They know rich guys like us are good for it, right?

Hey, I know. Let's steal another $3 Trillion out of the Social Security/Medicare Trust Funds --as Bush and the Republican Congresses did in the past 7 years. After all, the baby boomers don't start retiring for another 20 years, right? we got plenty of time to put the money back in.

Posted by Don Williams | April 17, 2008 4:06 PM

Oops. Maybe the Chinese won't be chipping in that second slice of $1 Trillion after all:
---------
"China will stop stockpiling its massive foreign reserves, China's central bank governor Zhou Xiaochuan said in an interview published Tuesday.

In an interview with the Emerging Markets magazine, a Euromoney publication, Zhou was quoted as saying, "Many people say that foreign exchange reserves in China are (already) large enough,".

"We do not intend to go further and accumulate reserves," Zhou said, adding the government will "cut a small piece of reserves" for a new agency to be set up by China's central bank and finance ministry to manage its massive foreign reserves, which have swollen because of the trade surplus. "
Ref: http://www.cnbc.com/id/17709891/

Posted by Don Williams | April 17, 2008 4:12 PM

After all, this Bush Prosperity has been based on Bush borrowing $5 Trillion and buying all his rich buddies drinks. We can always borrow another $5 Trillion, right?

Do you not understand the difference between the balance of trade deficit and the federal budget deficit? Because that would explain a lot.

Posted by right | April 17, 2008 4:23 PM

Re right's comment "This story was on the front page of the New York Times. The number $200 billion is in the second paragraph."
-------------
1) Excerpt from the New York Times article:

"In an action that sent stock prices soaring, the central bank offered to let the biggest investment banks on Wall Street borrow up to $200 billion in Treasury securities in exchange for hard-to-sell mortgage-backed securities as collateral. And the Fed made clear that it was prepared to do more as needed.

The move, which was coordinated with central banks in Europe and Canada, came on the heels of two similar actions on Friday, in which the Fed offered up to $200 billion in 28-day cash loans to banks and big financial institutions."

----------

Gee, I think there's a HUGE difference between the Fed announcing --as a confidence builder -- that it's POSSIBLY prepared to "loan" UP TO $200 Billion to the investment banks ---

versus the CONFIRMATION that the investment banks are so fucked up that they have LUNGED for MOST of that emergency reserve like a drowning man grabbing a life preserver.

Posted by Don Williams | April 17, 2008 4:24 PM

Re right's comment "Do you not understand the difference between the balance of trade deficit and the federal budget deficit? Because that would explain a lot."
----------
The fact that right evidently does NOT understand the strong linkage between the federal budget deficit and the trade deficit should be embarrassing. For right.

Would you like me to explain it in baby-talk, right?

Posted by Don Williams | April 17, 2008 4:30 PM

Re right's comment "Despite your conspiracy-ranting, there is a difference between "giving" $200B and "loaning" $200B, and if you don't know that I shudder to think what your personal finances look like."
-----------
Gee, if the "collateral" that investment banks are giving the Fed in exchange for $150 Billion wasn't pure SHIT, then they would have been able to sell it on the open market well before now, wouldn't they?

Isn't that how the much vaunted Republican free market is supposed to work? Isn't the government supposed to avoid handing out $150 Billion in WELFARE PAYMENTS because it might corrupt the morals of the recipients?

Gee, could it be that when the Republicans speak of the "free market" they are referring that that cozy little market in the Republican caucus --where lobbyists buy BILLION gifts from the US Treasury in exchange for just a trival payment of a $Million or so into a Republican's campaign coffer?

Could it be that this $200 Billion bailout is needed because our spoiled little rich kids on Wall Street are just as as stupid, incompetent, and bankrupt as their alcoholic President was a few years back?

Posted by Don Williams | April 17, 2008 4:39 PM

Would you like me to explain it in baby-talk, right?

I would if I thought you could do it without putting "billion" in all caps.

Posted by right | April 17, 2008 5:08 PM

Comment 1: China is now threatening to move its holdings into a basket of foreign currencies. Translation: dump the dollar. So this is a lot worse than just refusing to stockpile any more dollars.

Comment 2: "Friction"? "Friction?!" Some analysts are talking about "Great Depression 2" and the rest are talking "economic meltdown" and "worst recession in fifty years" and Matt the economically clueless is talking about "friction"?

Maybe Petey's right about "trust-fund baby".

Posted by Richard Steven Hack | April 17, 2008 5:21 PM

To Gabriel Sutherland

No, I don't blog. Thanks for the compliment,however.

Posted by Don Williams | April 17, 2008 5:35 PM

Don Williams is absolutely right. The Fed becoming lender of last resort and taking hot-potato securities is indeed corporate welfare. There's no way a toxic mortgage-backed security is worth its weight in Treasury securities. Subprime ARM resets are only going to continue in the next year, with something like 2 million resetting.

If we're going to go this route, I'd rather have the federal government set up another Home Owners Loan Corporation to purchase subprime mortgage notes with a policy of refinancing them into affordability. That way the welfare is at least somewhat more equitable -- investors get bailed, but more distressed homeowners would get to keep their homes. Fewer foreclosures means fewer destroyed neighborhoods, which would mean more homes could be resold, which should help stabilize housing prices. There is no economic good to be done by just letting investors hold on to notes they are too stupid to refinance.

Posted by StJoe | April 18, 2008 2:13 AM