One of the most interesting aspects of the emerging debacle in the U.S. housing markets is the fact that so many construction-related business owners and construction workers are still so navely unaware of the potential severity of the housing recession over the next few years. Indeed, the overwhelming majority of construction-related business owners and their employees, like many Americans, see the bursting of the housing bubble as a temporary economic problem that will sooner or later be solved by the Fed. Because the vast majority of business owners and construction workers still believe that the Fed will eventually save the day for those of us who work in the building trades, they discount the possibility that the housing-led recession will cause an immense amount of misery for them, (and the entire construction-related sector of the economy), for many years to come.
The sad fact is, however, that the Fed is all but impotent to avert a serious and long-lived recession in construction-related industries that will cause an immense amount of misery for an enormous number of people. In fact, contrary to what most business owners and construction workers think, it was the Fed that created the housing bubble in the first place, and, hence, it is the Fed that will ultimately be responsible for the misery we will be forced to endure in the building trades as a result of the busting of the housing bubble.
This article aims to alert construction workers and business owners to the fact that the bursting of the housing bubble will likely devastate much of the building industry for a very long time to come. The article also offers an explanation as to how we got into this housing mess in the first place, and offers some advice about how construction workers and business owners can at least lessen their exposure to the impending devastation of the building trades.
The Housing Recession Will Be Devastating
One of the main reasons why construction workers and business owners have been slow to recognize the severity of the recession facing the building trades stems from the fact that builders of all sorts believe that they provide services which are totally recession-proof for some reason or another. As a roofer myself, for example, I often encounter the phrase "People always need roofs" tossed around as a serious argument that roofing is a recession-proof industry. As another example, high-end builders of all sorts often brush aside recession worries with clichés like "The super-rich aren’t affected by recessions."
What these self-assuring clichés fail to account for, however, is the fact that entry into the construction trades is extremely open to outside competition. If, for example, one sector of the building industries gets severely crippled by a recession, workers and business owners tend to shift from the hardest-hit sectors into the lesser-hit sectors of the building trades — which inevitably increases competition for jobs in the latter sectors of the economy. This is precisely what occurs when so-called "storm chasing" roofing companies from outside states flood into cities after a hailstorm. The glut of "storm-chasers" drive down the price for a roof replacement dramatically below what native roofing companies otherwise could have charged in the absence of out-of-state competition. In other words, it is not enough to consider each building trade in total isolation from the other building trades, and in total isolation from other potential competition. Changes in one sector of the building industry can have far-reaching and important consequences on distant sectors.
These facts are critical for a proper appraisal of the current housing recession. For, as has been widely publicized, the current housing recession is primarily smashing those sectors of the building industry involved with new construction, and this fact will have momentous and cascading consequences for virtually every other sector of the building industry. This is true, in the first place, because much of the labor and capital (e.g., tools and trucks) that has up until now been working primarily in new construction will increasingly start to shift into the other sectors of the building industry. Roofers, for example, who have been slapping down shingles for KB Homes for the past five years, but who now find that there is little work in new residential construction, will now shift operations and compete with those of us who have until now been doing only commercial roofs. Once this occurs, there will be more roofers competing for the same number of commercial roofs, which will inevitably drive down the prices that roofers can charge.
Similarly, many of the thousands of unskilled and skilled laborers who have been working in new construction, but who are increasingly finding themselves unemployed, will try to find work in other sectors of the building industry, which will drive down the wages that construction workers in all other sectors of the building industry can demand. Those business owners who cannot compete under these emerging conditions will either have to go out of business or radically scale down their operations, and those laborers who are unwilling to accept lower wages will have to find employment doing something other than construction.
A similar shift in capital and labor will occur as workers leave cities that have heretofore been the epicenters of the housing boom, (but which are now suffering worst from the bursting of the housing bubble — e.g., San Diego, Las Vegas, and Miami) in search for work elsewhere. We are already seeing signs of this phenomenon in Denver, for example, with framers, roofers and masons from Las Vegas migrating East in the search for work as the housing bubble deflates faster and faster in Las Vegas and southern California.
These phenomena will be exacerbated as credit for new homes and home remodels dries up even more than it already has. As credit dries up, homeowners and other property owners will lack the capital to undertake the stupendous and wasteful projects that have until now fed the housing boom. Even in cases where property owners do manage to secure credit (through home equity lines of credit, for example), they are unlikely to waste their money on granite countertops and home theaters that they now know will not increase the value of their homes. These projects will no longer be viewed as "investments"; rather, they will be viewed, (rightly, I might add), as decadent forms of consumption. This depression of demand will restrict even further the amount of construction work that is available to bid on, which will further tighten the noose on businesses already strangled by increased competition from businesses from other sectors.
In sum, it is naïve at best and outright self-deception at worst for construction workers and construction-related business owners to believe that the bursting of the housing bubble will not affect their particular niche in the building industry. It would be more accurate to say, paraphrasing the cliché from above, that "while people always need roofs, will they be able to afford them, will they continue to demand the same expensive types of roofs, and will we be able to compete to install them in the future?"
What Caused The Boom In The First Place?
As was noted above, the idea that has been most responsible for the widespread complacency among business owners and construction workers with regard to the housing recession is that the whole housing crisis can be rectified through some action or another by the Fed. This idea is totally mistaken. The root of this mistaken idea lies in the failure of construction workers and business owners to grasp the root causes of the housing bubble in the first place. When the cause of the housing bubble is investigated, however, it becomes clear that the Fed itself was responsible for the creation of the bubble and it is now impotent to forestall a severe housing recession for long.
An example from my own construction experience is perhaps the best way to initially illustrate the Fed’s responsibility in creating the housing bubble. When I was a graduate student at San Diego State University a few years ago, I worked in a number of construction-related capacities in southern California at the peak of the housing boom. One of the most memorable jobs I undertook involved the remodeling of a horse barn for a doctor in the Temecula valley. This doctor had recently acquired a great deal of cash by means of a massive home equity loan, and he was willing to pay me and a good friend $17,000 of this newly acquired money to rebuild a part of his horse barn because he thought it a somewhat unsightly view from his swimming pool. (Interestingly, the good doctor did not, and still does not own horses). At the time, this sort of construction project was being repeated all over southern California, to the point where it would have been more profitable for me to remain a construction worker than it would have been to pursue a job with my graduate degree. Virtually all of the construction projects across southern California (and elsewhere), were financed with either gigantic home loans with ridiculously low interest rates, or, like the good doctor, with home equity loans with ridiculously low interest rates. What few people in southern California seemed to be asking either then or now, however, was where the banks got this massive amount of money to loan out in the first place? How, in other words, did the banks in southern California manage to miraculously come up with billions of dollars to loan out to homeowners who wanted to remodel their horse barns?
The answer is that the Federal Reserve under Greenspan the Magnificent created this money literally out of thin air. The Fed lowered interest rates through various devices (e.g., FOMC purchases of assets with money created out of thin air) to unbelievably low levels, and this action allowed the banks all across America to loan out massive amounts of newly created dollars. This new credit drove up price of real estate to stupendous levels, drove up the wages of construction workers to absurd levels, and dramatically increased the number of people working in the building industries. (It also, incidentally, spurred illegal immigration, as Mexican laborers found it profitable to risk crossing the border to earn artificially high wages from gringo jefes who couldn’t find enough workers to keep pace with the feverish demand for their building services.
The result of this flood of mortgages and home equity loans was, as we now know, an unsustainable and staggering boom in the building industries. The ultimate responsibility for this unsustainable boom, moreover, was, as was just seen, the Fed and its reckless and unnecessary increase in the money supply which allowed banks to loan out massive amounts of new cash which was subsequently spent on construction. The boom was thus not an expression of increased consumer demand for homes and $40,000 roofs. On the contrary, the boom represented an artificial and destructive bubble that could have been and should have been avoided with sound money (i.e., gold) and 100% reserve banking.
It also should be clear, moreover, that in order to continue this massive boom in construction the Fed would have to continue to artificially increase the money supply in the credit markets. This the Fed could indeed accomplish (and the Fed is in fact moving in this direction with its series of recent interest rate cuts), but the effects of propping up the unsustainable boom would be more damaging than letting the housing recession simply run its course. This is true, in the first place, because if the Fed floods the economy with more and more paper money and credit, this will merely postpone the inevitable recession and massively increase price inflation. Moreover (as I’ve written before), this price inflation will eventually make its way into the credit markets anyway, as banks tack on inflation premiums to their loans to deal with rising inflation. These inflation premiums will reduce the amount of credit available on their own (since businesses and homeowners will have to pay much higher rates of interest), because higher interest rates will, ceteris paribus, reduce demand for credit. In the second place, were the Fed to continue to inflate the housing bubble, this would temporarily induce even more people to move into the building industries, when, as was also seen above, a major part of the problem with the building industries is that there are already too many people working in construction.
How To Minimize Your Risk During The Housing Recession
If you are reading this rather dire prediction of the future state of the building trades, and you happen (like me) to work in one of those trades, there are steps you can take right now to minimize your risk of bankruptcy or long-term unemployment when the housing recession worsens. The first and most important thing you as a business owner or construction worker should do is to minimize the amount of debt you hold, and save as much money as you can for the future. If the economic conditions facing your trade change considerably over the next few years, you need to have the savings available to adjust to those conditions. If, for example, you are a business owner contemplating the purchase of a new fleet of vehicles for your building company or brand new Dewalt tools for everyone in your company because you think your company is "recession-proof," you might want to reconsider those purchases, or at least postpone them temporarily. If you’re considering moving into a larger and more expensive office or shop, you might want to put such a move off — at least until you’re reasonably sure that the demand for your services will continue to grow at the same pace over the next few years. Equally importantly, you ought to continually be asking yourself over the next few months: "What will I do if the market for X gets flooded with businesses and workers from the other building trades? Will I be able to compete? How?" Lastly, you need to be vigilantly aware of the rising risk of default facing your customers, and take steps to avoided getting caught holding the bag if your customers do lose financing or default before the completion of the project. Written contracts are an absolute must right now, and you ought to be wary of purchasing materials in advance for customers whose credit is even remotely suspect.
The risk of unemployment is rising for all of us employed in the building industries, and those who are not willing to work for reduced wages need to have the savings available to search for new work if we lose our jobs. Hence, it would be prudent for all of us involved in the building trades to plan ahead for the possibility of unemployment by reducing our debt and increasing our savings. If you are a construction worker who has no skills or training besides a certain building skill, you especially need to start saving your money as carefully as you can, because you may find it difficult to transition into a radically different line of work should the need arise.
The final advice I have for everyone associated with the building industries is to support the candidacy of Dr. Ron Paul for president. As was seen above, the source of our impending misery is the Federal Reserve System, and the destructive boom-bust cycle which the Fed inevitably creates. Dr. Ron Paul is the only politician in the past fifty years who understands what the Fed has done to the U.S. dollar, interest rates, and the housing market, and he alone has vowed to return stability to the American economy through peace, sound money and radically lower taxes.
Mark R. Crovelli [send him mail] writes from Denver, Colorado.