I have no idea if this is in reference to anything I have written but Bill McBride is emphasizing the following
This fits with the recent Reis data showing apartment vacancy rates fell in Q1 2011 to 6.2%, down from 6.6% in Q4 2010, and 8% in the Q1 2010.
Two key points I’ve made over and over are 1) with falling vacancy rates and rising rents, the number of multi-family starts will pick up sharply this year (but still be well below normal), and 2) this pickup will lead to a positive contribution to GDP and payroll jobs for construction in 2011, the first positive contribution for either since 2005. This survey reinforces both points.
I pointed out the differences between my perspective and Bill’s in earlier posts. I want to make sure that I recognize that Bill has been forecasting an increase in multi-family construction.
I am in agreement with his call, the series that he used to make the call and I think his analytical methods are solid.
The larger more macro-y points I want to make are in regards to construction and structural shifts in the economy.
First, the idea a lot of folks were pushing – that deep structural change was upon us – is largely wrong. There are major shifts going on in tech and offshoring but that has been happening since at least the late 90s.
Yet as recent as a year ago many were saying that folks in construction will have to find something else to do because we won’t be building homes for a long time. My point is that we are not building homes for cyclical reasons. If the market were in smooth equilibrium you would have already seen a construction recovery.
Second, a double boom phenomenon is building and I want to stake out early what I think is behind it. A few years back housing prices were rising in the face of tightening monetary policy but construction was actually falling. Now, we have loose monetary policy and housing prices are falling and construction is currently very very weak.
We are setting ourselves up for a boom in construction but I would not attribute it directly to traditional monetary policy. Instead the credit channel is all mucked in ways that are confusing the cycle. This is the legacy of subprime and the fact that it was a fundamentally technological development.
Again, I know the word technology has “positive affect” and people will want to push back on my use of it. Yet, if we ignore how words make you feel and concentrate on the underlying mechanics then subprime expanded the choice set and was thus a technological advance. When we think in modeling terms, we should think of it that way.
In this way we should look at the housing boom similar to the way we looked at Dot-Com. There was a gold rush. Prices went too high, too fast and that pushed some extra investment forward. However, we have to distinguish between the run-up in prices which was extreme and the actual push forward in investment which was mild.
Companies didn’t say well we’ve invested all we want in new tech for the next 10 years, we’re done. Similarly, America did not build enough homes during the bubble to last it for ten years. Construction is coming back and it was always going to come back.
This is one reason why aiming for soft landing is preferable to liquidationist mentality. Just saying, look all those carpenters need to just switch to doing something else is inefficient. We will need carpenters again and job switching costs are real.
Ideally you want an asymptotic approach to long run stability, not a get-the-rot-out crash. Yet, a crash is what we had. We can debate why, but the construction collapse was far more historic than the construction boom.
What this means is that we are now set up for a self-reinforcing boom on the other side. More jobs means more households means more construction means more jobs means more households . . .
This is not the kind of cycle we want. Yet, this cycle – I want to emphasize again – was created primarily on the downslope, not on the upslope. Here again is growth in the construction industry. Does the “boom” look weird, or is it the “bust” that stands out.