Slowdown in Home Mortgage Demand Will Lead to Decline in Home Construction

While many expected the record-setting home sales pace of 2000-2005 to slow down, not everyone predicted such a rapid decline in the nation’s housing market.

As a result, there will be an overall drop in construction spending next year, with spillover effects in areas such as job growth and real-estate development.

In a closely watched report, McGraw-Hill Construction will forecast the first decline in overall construction spending since 1991. The company says the value of new construction will decline 1% in 2007 to $668 billion, compared with an expected rise of 1% for 2006 and a 12% increase in 2005.

McGraw-Hill said the anticipated decline was due mostly to a 5% fall in construction of single-family homes. However, the overall drop also reflects a 3% slide in construction of stores and shopping centers, a component closely tied to population growth and home-building trends.

“Single-family housing has fallen more steeply than what we had anticipated and the correction is taking place faster,” says Robert Murray, vice president at McGraw-Hill Construction, a unit of McGraw-Hill Cos. The industry “no longer has single-family housing to bolster total construction.”

The construction industry accounts for almost a tenth of economic activity. Therefore, its contraction could have a ripple effect through the economy. Local governments’ ability to raise revenue through development fees and taxes, especially in fast-growing parts of the country, could also suffer.

The McGraw-Hill forecast comes on the heels of a report by the Census Bureau showing that home builders have had to slash prices to sell residences. There simply hasn’t been enough home mortgage loan applicants with values at the levels they’ve been.

Although new home sales for September rose 5.3% to a seasonally adjusted annual rate of 1.075 million, the median price fell to $217,100 (from $240,400 a year earlier). That was the lowest price in two years and the biggest year-over-year decline since December 1970.

Meanwhile, at a conference in Washington, David Seiders, chief economist of the National Association of Home Builders, predicted average prices of single-family homes will drop next year. It is the first time the trade association has predicted a price decline in roughly a decade of providing estimates.

Seiders blames a combination of factors for the anticipated declines, including overbuilding, prices that have outpaced incomes, and rising inventories of unsold new and resale homes. The imbalance between house supply and mortgage deman - as buyers continue to sit on the sidelines waiting for prices to drop - has already had a significant impact on builders.