Is new construction going extinct?

The Source of the Trouble

A recession is a long-term slowdown in economic activity, generally defined as two consecutive quarters of decline in gross domestic product (GDP). The end result? Business slows, workers are laid off, and times get tough as the economy stalls.

The economy has cycles. Usually, after several months, things pick up as the country shakes off the recession. Often, the construction industry helps take the lead in getting things going again. Think of the ripples that move through the economy with new construction: Construction workers are hired. And so are people to make the concrete, lumber, bricks, blocks and accessories. There are landscapers, furniture makers, decorators and others to consider as well, all making money.

But the Great Recession that started in December 2007 was different. That recession was directly related to construction. The housing bubble had pushed home prices up beyond their actual values, prompting a lot of new construction. Then the bubble burst, which left banks with bad loans. It also left many people owing more than the houses were worth -- and a lot of empty houses on the market. When the housing bubble burst, the recession spread. People lost jobs and were unable to pay inflated mortgage payments. Banks foreclosed, flooding the market with more available houses. Construction in areas other than housing stalled as well. Because people weren't living and working or paying property taxes in economically depressed areas, governments in those areas had less money for roads, schools and other projects. In time, businesses would stop expanding too.

New college grads, often without jobs, moved in with their parents. Families who lost homes moved in with relatives. Couples delayed getting married and starting families – and buying homes. Mortgages were harder to get. As Stephen Melman, the director of economic services with the National Association of Home Builders putit, "the economic engine was in reverse."

As a result, the recovery in the construction industry has lagged behind the slow recovery in the rest of the economy.

By early 2012, things were starting to look up. Foreclosure rates were dropping. Building permits and housing starts were up a bit. The number of unsold new homes was lower than it had been in years. But home prices were still down, and demand for new houses was still depressed. Part of the problem was the housing industry's shadow inventory -- the unknown number of existing houses available but not on the market. These are houses in the foreclosure process or about to be. In some cases, houses have been kept off the market until prices go up. Nobody knows how many existing houses will eventually be for sale. In February 2012, The Wall Street Journal reported that there could be as many as 10 million shadow inventory houses [sources: Tarbox and Whelan]. That prospect keeps housing prices low and discourages construction.

Yet, there were signs that the construction recovery is beginning.