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Home Construction Grinds to a Halt

By: Steve Johnson

10/17/2008 - 17 Comments

Construction starts on new homes fell to a new 17-1/2 year low in September as builders scaled back amid a worst housing slump in decades.

Growing turmoil in financial markets didn’t help as permits for new homes are at a 27-year low. The Commerce Department reported on Friday that starts on new homes fell 6.3 percent to a seasonally adjusted annual rate 817,000 units, their slowest pace since January 1991.  A much bigger decline than the 1.6 percent decrease that had been expected.

Home Depot

Home Depot is the world's largest home improvement store chain operating 2,258 stores in the United States, Canada, Mexico and China.

Earlier this year, Home Depot announced that they are closing 15 of its stores, affecting 1,300 employees. It is the first time the home improvement retailer has ever closed a flagship store for performance reasons. The stores to be closed consist of three in Wisconsin, two in Ohio, two in New Jersey, two in Indiana and one each in Kentucky, Louisiana, Minnesota, North Dakota, New York and Vermont.

Over the next few months, the competitors to Home Depot like Menards, Lowe’s and True Value are likely follow by closing a few of their stores.

Commercial Construction

The pace of U.S. commercial-construction activity has remained strong despite a sharp contraction in housing, but it is showing signs of slowing and could drop next year for the first time since the early part of the decade. The pullback of consumer spending is putting the squeeze on investment money of retailers, banks and restaurants. The mortgage companies that have went out of business are also freeing up commercial office space – which is lowering rents and reducing the need to build more office buildings. 

But, as long as interest rates stay low, commercial construction will likely fair better then residential construction.  Federal government spending on infrastructure, such as roads and bridges, could also strengthen commercial construction in the next few years.

A few months ago, construction material costs shot through the roof along with gas prices, which directly increase the shipping costs of construction materials.  But, now that oil have fallen back to $70 per barrel and interest rates are still low, this could be the best time to build for the next ten years.

Road and Municipal Construction

Road construction is still running strong, because the roads are still full of drivers. But, if oil prices were to drastically increase, consumers are likely to reduce their driving and the number of drivers on the roads would drop, which could cause cities to postpone road construction projects and maintenance. 

Dropping tax revenues from reduced property taxes and consumer sales are going to put road construction and municipal building projects on hold. City leaders are quickly finding themselves short on budget dollars.

Boomers are Creating Growth

The only construction markets that look to be growing are related to the baby boomers.  As the baby boomers move into their 60s’ and 70s’, they are looking for more health care and assisted living housing.  Also, hospitals are expanding and newly designed apartment buildings are under way for assisted living arrangements. Although, many baby boomers are waiting for the housing market to recover so they can sell their house.

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