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Tuesday, June 20, 2017

Is Building About to Take Off, or Not?

On my way to work this morning, I took a slightly different route across campus and was taken by surprise by the number of construction projects I was forced to detour around. My first thought was that you Penn State alumni out there who Go Wood would be interested in seeing some of the changes. So I snapped a few photos...

It started simply enough, with a sidewalk detour. But then...
Oh, no! Some of you may remember one of my favorite places on campus, the plaza behind the Music buildings, which used to feature a mid-century modern water fountain and shade trees. They're gone now. I hope the replacement features something watery, or I'm going to be mad.
Just putting the finishing touches on the new water tower project behind the Architecture building.
So far, every project had been functional cosmetic. But...boom! New addition to the Ag Engineering building is huge.
And this even larger building is a new Chemistry building, I think. At least it's where the old chemistry building used to be.
End of this walk, at least. New dorm is nearing completion in the East Halls complex. This one features rooms with sunset views...should be nice.
Penn State always seems to have some construction going on somewhere on campus, but this summer is the wildest in the fifteen years I've been here. Academic boomtown, including State College just across campus, which has three new high rises under construction and a couple of more blocks under negotiation. What is going on here? Is the economy really that good?

All this construction in a large, traditional university seems to fly in the face of technological trends, which all seem aligned against classical brick-and-mortar education in the near future. But we seem to be banking that future generations of 17-year-olds (and their parents) will still be placing a premium value on "the experience" of a few years in the hallowed halls of academia. We'll see.

Are you seeing similar signs of an awakening of the construction industry in your town? You may be, but I'll bet it's not in private housing units. The data there are still reflecting a pretty bare-bones housing economy. In the sense that young first-time buyers are still moving into apartments and condominiums, and the well-off are still buying property with cash and jumbo loans...but the middle of the housing market is still stuck in neutral with flat used home prices and interest rates.

Housing starts have come into line with the "moderate" case I forecast back in 2009, but seem to be really weak this year, and remain near historical lows going back more than fifty years.
The many construction companies I work with were all brimming with expectations of a boom year in 2017. And I mean all of them. I was a little less sure...it always seemed to me that policy changes have to be enacted and take effect before enthusiasm can be captured...and that a couple of years seemed reasonable. In my latest visits, the companies down in Northern Virginia and Maryland are all, in fact, having a moderately strong summer...but the further I drove from Washington, D.C., the less robust production seems to be. In other words, the same as it's been for a decade now.

So where's the boom? Well, I plotted another graph today that gives us a hint...

The "Trump Bump" shows up clearly in the stock market...but not yet in housing starts.
Investors, at least a certain class of investors, have been bullish on the American economy this year...by putting money into the stock market. But those folks whose largest investment is a new house, are still a tiny minority of the population actively investing these days.

From an article I saw in the local news last week...
"US housing starts drop for 3rd straight month
BY JOSH BOAK
AP Economics Writer
WASHINGTON 
Homebuilders slowed down the pace of construction for the third straight month in May, a possible sign that the shortage of houses for sale might worsen.
The Commerce Department said Friday that housing starts fell 5.5 percent in May to a seasonally adjusted annual rate of 1.09 million units. This comes after a 2.7 percent monthly decline in April and a 7.7 percent drop in March. Home construction is still 3.2 percent higher year-to-date, but that increase has been too modest to address the dwindling supply of homes.
Homebuilders remain optimistic about their sales prospects, but the level of construction has done little to meet demand from would-be buyers. The number of existing homes listed for sale has been registering annual declines for roughly two years — creating a dearth of properties on the market.
"The lack of inventory of homes for sale is one of the most pressing challenges in the housing market today," said Mark Fleming, chief economist at First American Financial, a title insurance company.
The monthly declines in housing starts come despite a solid job market with a relatively healthy unemployment rate of 4.3 percent. Many analysts expect the job gains to translate into more home construction. What has generally happened is a decline in the construction of apartment buildings that has been more than offset by the gains in the building of single-family houses.
Groundbreakings in the Northeast were unchanged in May and declined in the Midwest and South. Housing starts rose slightly in the West.
Building permits, an indicator of upcoming construction, tumbled 4.9 percent nationwide to 1.17 million.
U.S. homebuilders have stayed confident. The National Association of Home Builders/Wells Fargo builder sentiment index registered at 67 in June, a slight decline from May. Readings above 50 indicate more builders view sales conditions as positive. The index has been above 60 since September.
Homebuilding has recovered from the housing bust that tore through the U.S. economy a decade ago. While the rate of construction is generally improving, it still lags the 1.4-1.5 million annual rate that was common in the 1980s and 1990s."
I find a few points in this article interesting. First, that homebuilders are slowing during what should be the strongest time of year for them, even though they "remain optimistic." Perhaps "remain hopeful" would be a more honest assessment of their mood. Secondly, that "many analysts expect the job gains to translate into more home construction." If so, then those are pretty shallow analysts, since any job gains are really a manipulation of government survey statistics, and don't really reflect the flatness (and decline, in real terms) of salaries and wages in most traditional industries. Welders and truck drivers near gas fields can only buy so many houses.

Finally, the statement that "Homebuilding has recovered from the housing bust that tore through the U.S. economy a decade ago" is laughable, or would be, if so many so-called reporters weren't saying it. We're still at the worst housing construction levels in more than fifty years, as the blue line on my graphs shows.

The question is...are we about to finally break out, and follow the optimism of the stock market? Or is the weakness in the housing sector a red flag that shows the stock market bump is about to deflate?

If the construction activity in State College is any indicator, good times are just around the corner.

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