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Economic Forecast: 30% - 40% Drop in New Home Construction (Career Toolbox Podcast)

May 22, 2020

Buckle up and buckle down; it's going to be a bumpy ride. But the future is what you make it. READ.

EDITOR'S NOTE— This episode was recorded during the initial wave of COVID, and the country was plunging into a recession. The economic forecast has changed since then, but the advice contained is still excellent because economies go up and down all the time.

To kick off this series on career options, I invited back my friend and advisor, the economist Elliot Eisenberg.

You've heard him before, on Career Toolbox, but beyond here on ProTradeCraft, you may have heard Elliot speak on cable news programs, talk radio, and NPR – he makes the rounds.

A former Senior Economist with the National Association of Homebuilders and a regular consultant to several large real estate and professional associations, among Elliot's most prestigious positions is his role as Chief Economist at the ProTradeCraft Career Toolbox. And for that, we are thankful.

I invited Elliot back to our show because since we last spoke, things have changed dramatically and unexpectedly. I asked him what's happening and, more importantly, what's coming for our industry as homebuilders and remodelers – is it time to hang up the hammer and hit the books (instead of nails)?

But first, a few words on COVID-19

The good news is that most states consider construction and home repairs an essential business exempt from mandated closures. The states not exempting construction include Michigan and New York.

Everyone else is working – or at least they could be if there's work.

The bad news comes with the economy, as builder confidence and housing starts are plunging. More on this when we speak with Elliot. The NAHB ran a survey on the percentage of builder's responses to the COVID, and here's some of what they found:

  • 48% have halted construction on some or all of their projects, but only 25% have laid-off employees.
  • 84% allow non-construction employees workers to work from home.
  • 17% have donated their stock on N95 respirator face masks.

FP: Elliot, thanks for agreeing to come back to the Career Toolbox.

EE: My pleasure, absolutely excited, Fernando, thank you.

FP: As an economist, you're always at risk because you're in the business of making predictions. So, brace yourself because I am about to consult your crystal ball.

It may be a good time to pick up some community college classes

The last time we spoke, you were so high on the construction economy that you urged listeners to drop out of the Ph.D. program immediately and get a job laying bricks. Are you still pumped on careers in construction?

I still am, but there's a little bit of a delay, let's put it that way.

Yeah, things were fine. Things were good. The construction industry was slowly improving, and then last December, December 2019, and January and February 2020, it went into overdrive. It was contributing to GDP; it had its best three-month run in 12 or 13 years, 1.6 million units; it was great.

And then, of course, COVID-19 comes, and everything goes into the dumpster fire, if you will.

So now, with a case of "Woah, slow down." College suddenly looks a little more appealing, or community college or grad school or whatever it seems more appealing than it did before because jobs are no longer going to be nearly as plentiful as they were. Builders are going to struggle.

FP: So how do the stats look for home building and remodeling thus far? I know we've only got first quarter steps at night. I always hear when I listen to the news that they talk about first-quarter stats, which sound pretty bad, they say, but the second quarter will be even worse right?

The housing market is going to nosedive; remodeling could remain solid but not strong

Right. That's exactly right. 'cause in April, we were closed down the whole month; in March, we were only closed down at most half the month, so the April data should be at least twice or three times as bad. It will probably be four or five times as bad, actually.

On the remodeling side, things don't look all that bad for two reasons:

People need to remodel their house, they've got kids, the household, it grows the refrigerator breaks, they can't get a new one that fits the right size. The roof breaks, which is a required fix, such as a leak.

So more remodeling activity, we'll probably go from rising at 3-4% a year, are probably declining at 1% or 2% a year, so the gap is not trivial. A 5-6 percentage point change from being up a little, down a little, but clearly not a trauma, not profound trauma here in the remodeling business.

On the new construction side, however, when you have recessions, generally speaking, housing and autos really take it hard. And we know already in the auto market that auto sales have fallen from a February level of about 16.8 million down to about seven million.

So if you're looking at well over a 50% decline. And autos are something you can only delay for so long. Eventually, you need to get a car, in your car, breaks or whatever it is, you need to get to your job.

So I suspect that housing is not going to be doing substantially better. Now, there's good news in the auto market, the good news is auto sales seem to have bottomed out in April. By the end of April, they were going up. They were still very low, don't get me wrong, but they were improving.

So it wouldn't surprise me if housing had a slower but similar trajectory. Where people are locked in their houses, realtors can show homes, but home builders can't show houses; it's against the law. Now it becomes allowed, they can do virtual tours, maybe in a month, they open up showing market realtors can show houses. Then you could see things improving.

but I suspect in the very short run, next couple of months, builders finish the houses that they built or are in the process of building now, 'cause you can't stop, and then things kind of tighten up. Banks don't wanna lend so much, buyers aren't so interested, lines of credit, or harder to tap, and we go into a mild slow-down phase. Maybe we're up from the bottom, but we're not doing particularly well. Unemployment is too high, people are uncertain, and loans are now harder.

So this will all put the breaks to some extent on housing. Housing has to fall by 30% or 40%.

FP: Now, I notice when I go to Home Depot that it's packed; it's worse than the grocery store, which I guess goes to your comments on remodeling that that's still strong. People are fixing their houses, and maybe they have a lot more time to do it. They're sitting home

EE: Yeah, the honey-do list grows.

I know mine has grown tremendously, and so has my house. It's just looking great. I painted, I planted a garden. What dollars I have left Home Depot has confiscated.

The recovery—with no COVID outbreaks—could take two and a half years

But now you're kind of projecting a little bit of a very different turnaround than our president is projecting. Do you project a quick and robust rebound in construction in late 2020 or 2021, as our president predicts? Or you've got a little bit more but a dark view.

I wouldn't say it's a dark view, that's wrong, but I don't think it's quite as sunny, let's put it that way. I think the way to think about this recovery is to think of it as a checkmark shape recovery, whether the decline is very steep and the recovery—assuming we don't have some bad rebound COVID activity, which is always a possibility. Either in the fall because when flu season annually comes it now. packs a COVID-19 punch as well and, or as we relax, social distancing, suddenly, COVID cases start spiking again.

So assuming neither of those things really badly, or if they happened and we're not prepared for them, that's more important, really. We can deal with it over ready for it. We have hospital beds, ventilators, PPE Equipment so on.

If those don't happen, we steadily recover. We might have a particularly good fourth quarter or a particularly good third quarter if we're very lucky. But then next year's growth is, you know, three percent, better than two, but say it's three for a couple of years, and by the end of 2022, we probably regained everything we've lost.

So it is going to be two and a half year-recovery of what we lost in two months.

This is gonna take time, right? And this is a good scenario, It could be worse; it could go off the rails if health issues aren't resolved sufficiently.

FP: So even if the cove comes back in the fall, if we're ready for it, if we have the medical personnel, the hospital beds, the equipment, etcetera, it won't be the same shock to the system that it was initially.

Now is the time to build your skill set

EE: Correct. Very much so, So I think we've all learned what social distancing means, we've all learned what lockdown means. We all learned how to go and zoom into a Zoom webinar conference calls and so on the arranged our work; office space will be shaped differently, restaurants will know how to do take-out, and curbside pickup at Best Buy and whatever it is.

So the transition won't be so hard. We will have done it, and hopefully, the hospital side will have the kit that we need to do what we have to do, and as hospitals don't get overwhelmed, then it's a manageable crisis.

'Crisis' is the word, but it's manageable. If the hospitals are overwhelmed, then the number of death begins to really skyrocket, and that becomes a national tragedy.

So I'm optimistic that we can be ready—this is six months away, seven months away from November. We should be able to get ourselves together by then.

FP: For those in COVID confinement for another few weeks, or if they're working at a company that won't be gearing up any time soon, how do you recommend using your time productively?

Like drywall installers can't telecommute to work. What should we be doing today? Reconsider college, find another career?

EE: Those are extreme cases, and it's hard objectively; it's very unlikely that an economist will suddenly decide to become a ballet dancer; it's just really unlikely. I've got skills, and I'm gonna use my skills in some way.

So, I think outside the box, obviously, is one thing, but I think the simpler thing is to do a product line expansion, if you will, in this case.

Learn about new products. Spend your time learning about new things that you can learn to do as a drywaller, as a painter, or whatever. Installing new things, new flooring, joist system designs, or whatever it is, you become a much more productive person with a broader set of skills.

So you can answer the call when "Can you do this?" "Yeah, I can do that." And you may not have physically done it before, but you read about it, you understand it, you've watched a couple of seminars on it, and you're ready to give it a whirl in a real-world scenario. And you won't say "no."

Because we all have to broaden our skill sets right now, and that's the easiest, the most direct way for a construction guy to do it.

I'm doing the same thing and lockdown as an economist; I'm learning new skills.

FP: So if you're a drywaller, the example I gave, one thing you know how to do is how to measure, right? Because you know how to measure the sheets to piece in the drywall, so you can take that same skill set and apply it to flooring like you said, or to other types of installations that require those same skills.

Why can't you do draperies? Learn how to install draperies. interested in, Figure it out. Broaden your sets, and you can say yes to more things.

That's really the critical thing—the answer's always gotta be "Yes," because you may not have enough work in what you did before if too many firms in that industry decide to go all belly-up.

So I can use that skill since I've been hanging draperies and doing some of those kinds of things around the house. Thanks for the suggestion. I never thought of it in that way. But when you talk about broadening skills, you really mean it, not just in terms of taking something you already do and applying it in a slightly different way but thinking in terms of doing something completely new...

EE: ...but not so unfamiliar that you're gonna be afraid and reluctant and resistant to doing.

Don't become a deep-sea diver looking for treasure at the bottom of the Pacific Ocean or in the Mariana Trench. Pick something close.

I picked up new skills, I'm reading a whole bunch of academic articles, learning how to do some new technology and mathematical skills that are gonna make me a better economist.

That stuff I just don't have time to do before, so I'll be able to be a little better.

Give "yes" for an answer

FP: Well, good, we look forward to speaking to you again maybe in about 6-8 months' time to see how things have gone.

Would you consider another if you're still doing this type of gig?

EE: Absolutely. This is the highlight of my professional career, as you mentioned in the introduction.

FP: Well, thank you, Elliot, so much, and glad that you were able to make it. A little perspective on what could be, in some great advice from our Chief Economist Elliot Eisenberg Ph.D., who won't be picking up a hammer or learning to ballet any time soon.

Some parting advice from someone who still wears a tool belt

Our business advisor David Gerstel, the author of the seminal Running A Successful Construction Company and most recently Nail Your Numbers about accurate estimating, has some thoughts and astonishment.

"Roll up your shirt-sleeves and start reading. Read the best books on construction company management that you can find. Figure out how to re-engineer your company to weather hard times and blossom during good times.

If you get knocked down, but you don't wanna quit on your dream of being an independent builder, start reading more. You may have thought that what you did not know did not matter. It does. Have the humility to learn what you don't know from those who do, and use this new knowledge to engineer a stronger comeback.

In other words, if you wanna climb high, don't climb up a cheap ladder. Use your time to build a strong scaffolding of rock-solid knowledge instead.

The future is still ahead.

—Career Toolbox is hosted by Fernando Pages Ruiz and is a production of ProTradeCraft and the SGC Horizon Media Network.

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