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Is new construction going extinct?

Making Progress, Slowly
The housing industry may have taken a hit during the recession, but it's making its way back.
The housing industry may have taken a hit during the recession, but it's making its way back.
Gary Conner/Getty Images

New construction took a huge hit in the Great Recession, but it's coming back -- slowly. In the early months of 2012, national organizations of contractors, architects, cement manufacturers and others in the construction business reported seeing improvements. Most expected new construction to improve slowly in 2012 and do considerably better in 2013.

The recovery in new home construction is likely to be slower than in other areas. That's because of the lingering effects of the collapse of the housing bubble, foreclosures, the shadow inventory and the tightening of credit.

In general construction, people in the industry expect business to pick up in areas such as hotels, medical facilities and private institutions of higher education. Public spending on construction -- highways, bridges, public universities and other infrastructure -- will depend on politics as well as the economy, so that's harder to predict.

Residential construction will be slower to pick up, but the recovery was starting by February 2012. As the economy recovers, people are marrying, forming families and leaving relatives' homes. Government programs designed to help people refinance were starting to reduce the backlog of houses on the market. There is growing demand for housing, and some of those people will want newly built homes.

It's much harder to get a mortgage now than before the bubble burst. So construction of new rental units – apartment buildings and town homes – is expected to pick up first. Remodeling is also picking up, as some people decide to fix up what they have rather than buy a new home.

Construction of new single-family homes took the biggest hit in the recession. Starts of new single-family homes dropped about 75 percent from 2005 to 2011 [source: Melman]. But housing starts were up in January 2012 almost 10 percent over a year earlier, according to the U.S. Census Bureau. The number of foreclosed homes on the market and the shadow inventory are declining. As the economy strengthens, there will be new jobs. This cycle of the economy may be slow, but there are good signs that recovery is beginning. With it should come increased confidence, with banks more willing to make construction loans and mortgages. Increases in 2012 are expected to be modest, but the home building industry expects good news in 2013 and beyond.