Merrill Lynch Predicts Residential Construction Jobs Will Increase in 2013


Michelle Meyer at Merrill Lynch  wrote in the Calcculated Risk Blog:

We are still waiting for a strong increase in construction employment, but we  know it is coming. We believe 2012 will go down in history as a year of transition for  the housing market. Housing starts are on track to be up 25% and home prices are  set to rise 5% over 2012. We believe the recovery will continue into 2013 for  several reasons. Most importantly, household formation has started to turn  higher, reflecting the shortfall of household creation over the prior five  years.

In addition, listed inventory is low, owing to extraordinarily slow  construction and only a gradual reduction of the distressed pipeline. And  specifically for prices, there has been a shift toward short sales as a means of  disposing distressed properties.  Moreover, investor demand is strong,  particularly for distressed inventory.

We forecast housing starts to  increase another 25% to an average of 975,000 and home prices to increase 3% in  2013.  The housing market is turning into an engine of growth once  again. Housing construction will likely add 0.3pp to GDP growth in 2012 and  0.4pp to 2013 growth.

The gain in homebuilding will support related sectors  such as furniture, building material sales and financial companies. Moreover,  construction jobs will finally come back, allowing some of the 2 million people  who lost construction jobs to find employment in the field again.

There  will also be a jolt to the economy from the gain in home prices. An increase in  home values lifts household net worth and boosts consumer confidence. If  consumers perceive the gain in wealth to be permanent, they will increase their  current consumption. But the rise in home prices can do something even more  vital for the economy – it can spur credit creation, which then fuels housing  demand and reinforces the gain in home prices. We are seeing the very early  stages of a positive feedback loop between the housing market, credit market and  real economy, which can be quite powerful in time.

We are probably already seeing the impact of stabilizing prices on  housing inventory. If potential sellers think prices will fall further, then  they will rush to sell and list their homes right away. But if potential sellers  think prices are stabilizing, and may even increase, they are more willing to  wait for a better market or to sell when it is most convenient. I think we are  seeing that right now.

More importantly, I think stabilizing prices will  give hope to some “underwater” homeowners and we will probably see mortgage  default rates fall quicker. And over time, buyers will gain confidence that  prices have stopped falling, and I expect demand to increase – and also for more  private lenders to reenter the mortgage market and help support that demand.

And this demand will also boost homebuilding and new home sales – since  homebuilders will have a better idea of the pricing needed to compete in a  market (falling prices makes it hard to plan). There are several ways that the recovery in the housing market  multiplies through the economy. One of the key channels is to create jobs in the  construction industry and related fields. However, despite the 25% gain in  housing starts this year, the construction sector has not added workers. Looking  back at prior cycles, it appears that it is normal for construction jobs to lag  output by about a year.

We think we are on the verge of construction hiring.  As demand for housing continues to improve, construction companies will  likely become more comfortable expanding their workforce. In addition,  construction workers do not just focus on new construction; they can also find  employment for renovations. Renovation spending has been on the rise and will  likely receive a boost from Hurricane Sandy rebuilding. We think the future  looks brighter for construction workers.  Read More.


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