Construction slump to last at least 5 years

Re: 'Home construction spending falls 53% from peak' (Feb. 2)

Dear Editor:

There certainly is no surprise in the 53 percent decrease in residential construction spending from the high point in March 2006. The decline in new construction will continue for at least five years as a result of a number of factors.

Excessive inventory of new homes: The real estate frenzy led to the construction of more housing than was actually needed to meet the demands of the population. Much of the residential construction was developer-driven as opposed to being driven by market demands. There are gluts in a couple of property types, most specifically in the "McMansion" and overly large homes designed for the upwardly mobile as well as in the condominium arena, which was fueled by speculation. Each of these was supported by easy credit, and both feature an inordinate number of foreclosures or developer sell-offs at below-market values.

The result is an overabundance of housing that will require demand to increase to the level of the supply. The stagnation of this economy will exacerbate the amount of time necessary for absorption as jobs are lost and families who would normally have "moved up" remain in their more modest homes.

The outlook for condos is much bleaker with many lenders no longer offering financing, because the underlying investors view these properties as extremely high-risk.

The condo market was typically seen as an entry-level property, city home, second home, or retirement option. All these segments combined represent a small percentage of the overall real estate market. While sales in the first-time homebuyer and empty-nester markets are probably the most active in today's market, many of these buyers are now opting to purchase a single-family home for the same price or less as a condo in the same neighborhood just a few years ago.

Credit Crunch: The news is dominated on a daily basis with the fact that lenders (investors) are tight-fisted with their dough. The old adage "Once burned, twice shy" comes to mind. It is highly ironic that those who lent money to real estate developers for just about any project, whether or not the market showed a need, are now turning their backs on pretty much any project that is related to bricks and mortar … drywall and tape.

One can anticipate that many of the recently built condominium projects that have not been sold will become regular rental apartments in the old style. The need to do this exists not only as a result of the lack of buyers but the need for rental units and to ease the burden of higher property taxes on condominiums.

Free-marketers always put forward the argument that the market will take care of itself and that regulations strangle the ability of business to grow. The economic pain that we are experiencing as a nation is a great example of the duality of this philosophy. Absolutely the market will correct itself and respond to the stupidity associated with a corporate mentality that believes that a business organism can grow endlessly. There is nothing in business or in the natural world that can grow endlessly without experiencing a negative outcome. There is always a set point for healthy natural growth.

Hopefully the experiences of the recent past, along with the pain being experienced in the present, will create a future of reasonable regulation and corporate consciousness, and an environment for responsible investing and economic policy.

Stacey Maxwell
Classic Investment Community LLC
Orland Park, Ill.

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