Construction & Remodeling Economic Outlook Update

An unexpected new twist could seriously affect the remodeling, building, and home repair industry. As homebuilders finish off current projects, new home construction will continue to plummet as the glut of existing properties will take time to evaporate. And, as home prices drop over the course of this year and next, available home equity will also dry up. With less equity, homeowners will not be as willing to spend on renovation projects. Another expected trend has been workers and companies transitioning out of new home construction and into remodeling and home repair.

All of those factors were predicted and are coming true. However, the unexpected new twist is what really has economists worried. Over the course of the past two months, the credit industry has severely tightened their lending policies. Because of all the sub-prime loans that have and will continue to go bad, lending institutions have become afraid to approve new loans. Zero-down mortgage products have disappeared. Even people with good credit and down payments can't get a home loan. Their fear goes beyond mortgages, too. People with great credit scores and equity in their homes are being turned down for renovation loans. Others may be able to get a loan but the interest rates are so high that many are walking away.

With credit becoming more and more unavailable, it will continue to drag down the overall housing market. Not only are potential buyers waiting for prices to come down out now they may not even be eligible to get an affordable mortgage when prices do drop. This can only hurt the overall economy. Experts are suggesting the Federal Reserve may drop rates again at their next session in September, but it may be too little too late. If the housing market continues to affect jobs outside of real estate and lending, it could mean a very long and very tough 2008. A recession could be just around the corner.

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From the AP: "WASHINGTON -- Construction activity plunged in July by the biggest amount in six months as spending on homes fell for a record 17th straight month."

"The Commerce Department reported Tuesday that construction spending dropped 0.4 percent in July, compared with June, the weakest showing since a 0.6 percent fall in January."

From Bloomberg: "Homebuilders are scaling back to try to trim the glut of unsold residential properties even as companies are still adding offices and factories. The downturn may steepen as lenders make it tougher and more expensive to get financing following the sell-off in credit markets in August."

Also from Bloomberg: "So far, the Fed has refrained from reducing its benchmark interest rate, using other tools to ease tightening credit conditions."

"Federal Reserve Chairman Bernanke and his team lowered the discount rate, for direct loans to banks, by half a percentage point on Aug. 17. The main target rate remains at 5.25 percent."

"Officials acknowledged in their statement that risks to economic growth had 'increased appreciably.'' They next meet Sept. 18, where investors anticipate they will lower rates at least a quarter point."

"The Fed chief said earlier in his opening speech to the conference that the Fed 'will act as needed' should a sustained tightening in credit threaten the economy."