House Blend: July 2007

With housing starts and completions plummeting, economists wait for payrolls to follow.

By Malorie Medellin

Economists' predictions for employment in the housing industry are grim. With first-quarter housing starts and building permits down nearly 25 percent and 27 percent respectively, forecasts for layoffs in residential construction are topping off in the half-million range. And that's not including related manufacturing jobs, which puts the number closer to a million.

“I don't know how we can have a one-third drop in housing starts and completions and avoid very significant layoffs,” says Citigroup Senior Economist Steve Wieting. And while he notes that the housing cycle has gone through “bigger booms and busts” in the past, he still contends that gross job loss across the industry could exceed 500,000.

He's not alone. Economists at Goldman Sachs, Merrill Lynch, and Northern Trust are all waiting for the ball to drop on residential builders and specialty contractors. “I don't think this thing will turn around quickly,” says Paul Kasriel, director of economic research for Northern Trust. “You will see some sharp drop-offs first.”

In fact, some economists are wondering why such cuts haven't already been made. Between March 2006 and March 2007, housing completions were down almost 30 percent, yet employment for residential builders and specialty contractors only fell 4 percent. In a cyclical industry where payroll numbers often follow completions, this lag time seems longer than normal.

Dave Seiders, chief economist at the NAHB, credits much of the disconnect between productivity and employment to false industry classifications and a shortening work week. He says companies that are considered residential are gravitating towards the non-residential market, maintaining their numbers and not reclassifying themselves.

That, combined with dwindling work hours, has helped payrolls hold out, he says. “If you shrink the work week enough, you don't have to reduce labor.” Seiders still expects employment numbers to go down, but doesn't think there will be a real “thud.”

Nouriel Roubini, professor of economics and international business at the Stern School of Business at New York University, disagrees. “You either have a project and use the workers you need, or you lay them off. To do anything else doesn't make much sense economically,” he says. Roubini thinks big hits are right around the corner, predicting layoffs around 40,000 to 50,000 per month, starting later this year. He says that undocumented immigrant labor has been bearing the brunt of initial cuts for months, as represented in the massive decrease in remittances sent abroad. But those layoffs are going to start to affect reported payroll numbers soon. He doesn't see the market bottoming-out until the middle of 2008.

While opinions may vary in terms of the immediate future of the housing market, one thing can be agreed upon: We're not home yet. At the close of the first quarter, unsold housing inventory was at 2.18 million units and homeowner vacancy rates nationwide were at a historic 2.8 percent. The NAHB's Housing Market Index declined in all three categories in April, with current single-family sales, expected sales for the next six months, and expected traffic of prospective buyers all falling.

“There is a fundamental disequilibrium in the market now. Supply exceeds demand,” says Northern Trust's Kasriel, who predicts that housing completions should bottom out during the fourth quarter of this year, with job losses to follow. He also agrees that layoff predictions near 500,000 aren't too far off the mark.

Faced with the forecasts, home builders both nationally and regionally have responded in different ways. Centex Corp., the fourth largest home builder based on closings in the U.S., has had a 23.1 percent reduction in ongoing operations since May of last year. The SEC filing with the updated headcount came in almost two months after Centex posted a $22.3 million loss at the end of the fourth fiscal quarter.

Regionally, Orlando, Fla.–based Park Square Homes has trimmed its numbers by 40 percent, from 276 to 160. “We're down to the bare bones of the company,” says Suresh Gupta, Park Square Homes' CEO. He does not anticipate any more layoffs.

It's hard to say when things are going to stabilize and when employment numbers will shift. The NAHB's Seiders says that his forecast is an optimistic one, possibly too optimistic. While hoping that construction value will improve slightly in the second half of the year, he admits, “We'd be deliriously happy if that happened at this stage in the game.”