It is clear in retrospect that in parts of the Sun Belt, the economic dependence on construction reached unhealthy levels in recent years.
-NYT

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File that sentence under “stating the obvious.”.

The reporter seems to have overlooked the fact that some people found it obvious — not in retrospect, mind you, but in real time. One only needed to have looked at the data and then compared it to historical metrics to reach the obvious conclusion that housing was way off kilter. What was taking place was a backwards, real estate driven economy.

Here’s an excerpt from the Times:

“In a little more than three years, the Phoenix area has gone from the hottest of Sun Belt hot spots to one of the nation’s economic disaster areas. It is not alone in its rapid fall.

After riding high during the boom, the Las Vegas area, parts of southern Florida, and Southern California’s inland counties have also been brought low by plunging payrolls, billions lost in housing wealth, a continuing epidemic of foreclosures, record government budget deficits and stagnating populations.

These areas share one thing besides their warm climates. To a degree unmatched in the rest of the country, their recent prosperity was built not on manufacturing, technology or natural resources, but on construction and real estate — growth for its own sake.

As other areas tasted the excesses of the housing boom, they gorged on it. From 2002 to 2006, about 20 percent of private industry growth in the United States was tied to real estate and construction. In the Phoenix area, almost 36 percent of growth in the private economy during that period — more than $34 billion worth — came from real estate and construction.”

The entire piece — the print version was buried behind a weird headline in the Business section House by House, A Sun Belt Setback — is well worth a read.

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0828-biz-webgrowth

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Previously:
Half of New Jobs Are Real Estate Related (May 27th, 2005)

http://www.ritholtz.com/blog/2005/05/half-of-new-jobs-are-real-estate-related/

Real Estate and the Post-Crash Economy (December 29, 2006)

http://www.2000wave.com/article.asp?id=mwo122906

The Ongoing Impact of the Housing Sector (August 24, 2007)

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2007/08/27/the-ongoing-impact-of-the-housing-sector.aspx

Source:
Construction That Fueled Growth in the Sun Belt Slows
JOHN COLLINS RUDOLF
NYT, August 28, 2009

http://www.nytimes.com/2009/08/28/business/economy/28growth.html

Category: Bailouts, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

24 Responses to “2002-06: An “Unhealthy Dependence on Construction””

  1. wally says:

    And yet, the growth was lauded at the time.

  2. Marcus Aurelius says:

    “To a degree unmatched in the rest of the country, their recent prosperity was built not on manufacturing, technology or natural resources, but on construction and real estate — growth for its own sake.”
    _______________

    Sounds like the definition of cancer.

  3. Paul S says:

    As an architect, I can say absolutely this was true, and in nearly all aspects of the industry.
    But housing was especially absurd, and we all knew the painful day of reckoning would come.

  4. GB says:

    It makes me wonder if our consumption based economy will have to change forever now. Instead of slowly unwinding it we maybe facing it full force. Just a thought.

  5. deadonarrival says:

    @Marcus Aurelius

    So the latest version is that they pin all their hopes on an equity market rally (even though the P/E ratios on the the S&P are in excess of even the Nasdaq bubble levels)…

    Even sadder! And they’re doing it in broad daylight and funding it with taxpayer money.

  6. Pat G. says:

    “One only needed to have looked at the data and then compared it to historical metrics to reach the obvious conclusion that housing was way off kilter.”

    And it still is. One only has to look at the latest housing report to see that the monthly supply/inventory of newly constructed homes expanded not contracted. Then there are the foreclosure moratoriums which are only stalling the inevitable, the shadow inventory of owners waiting for price stabilization in order to list their homes and the wave of interest only ARMs which start resetting. Did I miss anything?

  7. Onlooker from Troy says:

    “And yet, the growth was lauded at the time.”

    And those prospering were considered economic geniuses. Even if they were just drop-out degenerates with no ethical or moral underpinnings hawking crappy home loans for fly by night mortgage brokers. They thought they had it made. And others were green with envy. When it all went to hell they had no idea what had happened. Stupid and immoral. What a combo.

  8. JohnnyVee says:

    The mainstream news is either wrong, old, or both.

  9. Onlooker from Troy says:

    doa

    So true. And one day some genius at the NYT or elsewhere will be writing a similar article wondering how it all went so wrong. How “nobody saw it coming.” And similar sentiments. It’ll be so enlightening.

  10. Onlooker from Troy says:

    Pat G.

    Good point. There’s not much being done to fix the gross imbalances that built up due to the easy money party. They’re doing more of the same and hoping like hell that it all comes back somehow. If we “extend and pretend” long enough our wonderful, magical money machine will be resurrected. Short-sighted and foolish as usual.

  11. winstongator says:

    I think you have to add in banking – mortgage, investment & other. Charlotte looks worse when the disproportionate share of city income from BoA & Wachovia is taken into account.

  12. torrie-amos says:

    In Dallas Ft. Worth I ran a construction company for 20 years. Breaking it all down, yes, we don’t have housing increases because land is still available within easy driving distance of employment, no state income tax, and an oil boom from early 80′s that hit real estate similar to other areas now, it took approximately 12 years for home prices to recover 1988-2000. Here is a real life example, a family memeber bought a condo for 107 in 87, in 2000 another family memeber bought one for 92k right next store, the owner had bought it 4 years previously for 87. Now they sell for 130k, a fair price imho, prices peaked in 06 at 130 and have not budged down. Here we rely a tremendous amount on new schools, new universities, new hospitals, roads, and industrial and large commercial for the bulk of our construction, with low interest rates they all took advantage of it, and it has been good since 03, it peaked in q1, now the question is tax receipts, large commercial has slowed along with industrial. There are still projects on the board, yet, in typical fashion some are getting pulled, the ones being built are coming in way under budget due to competition and lower material costs, yet, now material costs have zoomed back up and that no longer happens. People are factually being layed off and no one is hiring, all are pairing back, 2010 projections will be down overall 7%, and in typical fashion this should be year one of 2-3 year slow down.

  13. Pat G. says:

    @ Onlooker

    I will consider buying one, when with a purchase of a house, I get two free. lol Kind of like grocery shopping.

  14. donna says:

    The entire history of the West has always been boom and bust. Phoenix is completely unsustainable anyway since it is using up both Colorado River water and ground water at a rate that will deplete both eventually. There’s absolutely no reason it should ever have gotten so big.

  15. Marcus Aurelius says:

    donna:

    We have our own version of the Aral Sea, only it’s underground (out of sight is out of mind).

  16. investorinpa says:

    Diana Olick has a good piece on CNBC today: http://www.cnbc.com/id/32569620

    I’m wondering why sales of homes “Not started” (i.e. still empty lots) rose 33 percent month to month, while sales of “Completed” homes fell 6 percent.

  17. Thor says:

    Fascinating – NY and LA are both interesting cases – there isn’t much open space left to build new house developments in either place, I wonder how much of that was retail and higher density residential construction.

  18. Avl Dao says:

    “…plunging payrolls, billions lost in housing wealth, a continuing epidemic of foreclosures, record government budget deficits and stagnating populations.”

    This also describes Chicago where 2.8 million (city alone) face each & everyone of those 5 conditions yet the common national anecdotal perception is that Chicago must not have overbuilt as badly as Sunbelt cities simply because it’s in the Heartland.
    So the economic engine of a 3-state SMSA of almost 10 million pins its entire 7 years of economic future on an October 09 vote by the IOC to award them the 2016 Olympics. Sadly the feverish fears lurking under such hopes reveal how this desperate play more resembles one of an emerging economy seeking entry to the world’s economic stage (Japan in 1964, Mexico in 1968, Korea in 1988, and China’s bid for the 2000 games where it led every round of IOC voting til losing in the final vote to Sydney)

    That Chicago may emerge as a bigger poster child for economic over-reach than even a Sun-Belt site is fitting given the shape-shifting nature of a crisis that emerged initially as a “contained” problem confined to sub-prime rez mortgages of latino & black homebuyers in a few rustbelt cities and transformed, Phoenix-like (pun certainly intended) into the globe-straddling multi-sector debt behemoth facing us today.

  19. Brendan says:

    I can’t read the entire article without a NYT subscription, but there appears to be a little lack of analysis on the part of the author. Why shouldn’t areas in the sun belt have higher rates of construction than those areas outside of it? It seems perfectly reasonable to me (from a strictly supply and demand perspective) that Florida and Arizona would be in an extended phase of additional building, being that these are hot retirement destinations and the boomers are coming to retirement age. Certainly it should be higher than the average of a list that presumably includes places like Buffalo and Detroit, right? Meanwhile Houston should be low, due to an extended hang-over from it’s own earlier housing boom (a very specific local issue). And somewhere like San Jose is naturally going to suffer due to it’s extremely high real-estate prices. Is Vegas really too dependent on real estate, or is its real problem that it’s too dependent on tourism? Meanwhile Portland has higher unemployment than Phoenix, even though it never became too dependent on real estate. Real Estate still is local, right? Is Phoenix too dependent on construction? Yeah, at least in the short term. But, based on migration trends, is it really out of line with where it should be compared to the national average (only ~1/3 greater)? No. Seems to me that NYC and MSP being close to average means that they might be too high. I don’t think it’s a sunbelt problem any more than a national problem. Wanna’ guess where all the demand for medical facilities will be in 10-20 years? Need to build the houses first, right? Until migration trends change, which I think they probably will, I don’t see this as a very accurate analysis of the housing issue.

  20. Thor says:

    Brendan – well said

  21. impermanence says:

    “Paul S Says:
    As an architect, I can say absolutely this was true, and in nearly all aspects of the industry.
    But housing was especially absurd, and we all knew the painful day of reckoning would come.”

    Just as the lawyers, doctors, accountants, and financial professionals have ALWAYS known the corruption that has been endemic in the professions for well over forty years. And still it goes on.

    Where ‘o where is the professional leadership in this country…

    …sold out for crumbs. So much for the ‘intellectual’ class.

  22. Drewbie says:

    “stating the obvious.”

    Or as we say in the industry, “No shit, Sherlock!”

  23. cvienne says:

    It sounds to me like a perfect example of where a CHASE becomes attached to perceived monetary gains versus where a viable sustenance lies…

    It happens all the time, in every industry, in every era, in every climate.

    Play at your own risk…

  24. jc says:

    RE in these areas has always been wild & woolley only this time the sand states are 21% of the national population instead of about 4% in 1920 and 6% in 1930. It makes a big difference in the impact on the national economy – and I don’t know if they all had the coincident peak they have this time.

    Eventually the shadow inventories of the big banks will have to be resolved. I see a US superagency taking title to these foreclosures at “fair prices” to save the lenders and avoid the next leg down into a depression.