Economic Indicators Show Steep Declines – Recovery?

The Mortgage Bankers Assocation numbers for November are pretty grim. For those in the land development industry, these numbers are pretty stark, although not surprising.

Private residential construction dropped 3.5 percent while private nonresidential construction spending fell 0.7 percent — the third decline in the last four months. A large drop in utility construction spending was largely responsible for an overall decline in nonresidential construction spending. Commercial construction spending, office construction spending, and manufacturing construction spending all increased during the month.

From a year ago, private residential construction spending has declined 24.2 percent. By contrast, private nonresidential construction spending was up 9.1 percent over the past year. Residential investment will continue to be a drag to economic growth again in the fourth quarter. During the third quarter, residential investment subtracted 0.7 percentage points from economic growth.

And for those in service industries…

Activity in the service industries also showed a massive deterioration in November, according to the ISM Nonmanufacturing Survey, which plummeted to a new record low in the relatively short 11-year history of the survey. Service activity trends in the ISM survey are largely consistent with the employment report. About two-thirds of the recent job declines have occurred in the service-providing sector. During the first eight months of this year, job losses were largely confined to construction and manufacturing.

It’s hard to find good news these days, as much as many of us feel this is a self feeding fire – the more bad news comes out, the more likely we are to respond in kind, making things worse. The MBA also reported that 2.2 million homes are expected to enter foreclosure in 2008 – and they expect even more to go into foreclosure in 2009. This is particularly bad news for folks whose work is centered around residential development, as a depressed economy and huge numbers of foreclosures means that private residential development will likely be worse next year than it was this year.

To make things worse, the job numbers in service industries are really taking a beating.

During the past three months, the employment base shrank by 1.256 million. Losses were broad-based. Job losses more than doubled in service-producing industries, to 370,000 in November from 153,000 in October… Average hourly earnings increased 0.4 percent, while the average workweek declined to 33.5 hours, its lowest on record.

Some folks are trying to find innovate ways to get people back into buying residential property. It’s likely that these innovative tactics will be necessary to spur any sort of spending from consumers given the glut of residential property on the market – and more to come. In New York, one developer is offering an interesting incentive.

Now, with the building just about finished, an amendment approved by the state attorney general last month offers a five-year “buyback guarantee” to buyers who sign contracts before the sponsors declare the condominium plan effective (after at least 15 percent of apartments go into contract to residential buyers).

Under the guarantee, on the fifth anniversary of the closing, buyers will have 90 days to return their apartments to Rockrose for 110 percent of the purchase price. However, the buyers will have to pay all closing costs, including transfer taxes and the sponsor’s legal fees.

These are the types of incentives that builders and developers are likely going to have to come up with in order to get people off the sidelines. Unfortunately, those coming off the sidelines will still have to qualify for the mortgage. If the government buyback of $600 billion in debt from Freddie Mac, Fannie Mae and Ginnie Mae is successful, it could mean that we could see banks begin to once again start providing loans. It is likely our best hope for the start of a recovery in 2009.