Construction Informer

As the built environment continues on its path of price adjustment there are few places on the globe where that adjustment isn’t taking place.

According to one British news report Barratt Developments is cutting its new home prices nearly in half and other builders there are building higher and selling cheap. A Barratt spokesperson says the discounts don’t necessarily reflect the company’s typical sales policy. Economists in Britain are saying house prices may be dropping by 30 percent between now and 2010.

The 100 biggest home builders in Australia noted a 5.7 percent decline in housing starts during 2007-2008. Housing starts are expected to fall another seven percent there during the remainder of 2008 and during 2009. At the same time Australia is anticipating more fallout from the slowing of construction in China. Australia’s major export is iron ore and the Chinese will be needing less of it as its building businesses slow due to the tighter credit markets.

In India builders of flats are contending with a custom called the “carpet rule.” Basically the square footage they are supposed to charge for should only include the inside dimensions - the floor area that would be covered with carpet. The dimensions included in the wall thickness, balconies, hallways, and stairs are not included in the price. Although we all know that somehow it must be. Builders have been ignoring the rule and so some charge that prices have gone up by 50 percent. With square foot costs at Rs. 25,000 ($536) per square foot it’s easy to see why some people might be crying foul.

Finally, in the U.S., at least in some markets, high end homes are showing weakness. Luxury builders in the Charlotte area are selling off prime lots and cutting deals to get rid of spec homes. Expensive homes there have been feeding the desires of the area’s financial services sector for the past decade.

I put up a basic poll in the sidebar earlier in September and it just finished up. There really weren’t enough responses to make it significant. This blog is getting 12,000 page views a month so it’s kind of surprising that there weren’t more votes. Of course the topic was probably kind of lame. I mean, really, who cares in construction what OS you use. I guess just me and a few others. But mainly I wanted to test the plug-in and widget.

Internet polls are far from scientific but I think if they get enough responses they can indicate trends. For the polls on these pages I have disabled the “ISP cookie thing” so in effect people can vote more than once. I just figure there are enough cookies floating around and the people who stop by here are probably not interested in skewing my little polls. 

For the next ten days the poll on the right seeks to discover just how real this credit crunch is for those who are in construction. I’ve been hearing from several sources that it’s simply more smoke and mirrors and that good businesses are not having any difficulty with credit. After all, aren’t banks in business to loan? How could they all of a sudden decide a long-time customer with an excellent repayment history and a realistic business plan isn’t worth the risk? If they do that, why not just go out of business.

Anyway, maybe your vote will add to some clarity. Comments are always welcome also.

This post doesn’t have anything directly related to construction. But I’m building here so be patient. Future posts will pick up on some of these ideas and carry forward.

I’ve been watching American politics with discernment now for at least 35 years. That accounts for nine presidents, (a few had two terms), and countless Congressional sessions. During all of those years, and political intrigue, this is the first time I’ve seen the federal government living in crisis mode most of the time. Making laws out of fear isn’t very enlightened, and when it becomes the modus operandi of a government it doesn’t inspire confidence. 

It’s hard to say if there is anything left of what Adam Smith aficionados call a “free market.”  Most days now I just read the financial headlines and shake my head. I believed there were people who were educated about economics, and who were devoting their lives to keeping track of important concepts like this and would blow a whistle or something when things got out of hand. But apparently that hasn’t been the case. You can get any story you want from economists, you just have to ask the right ones. Suffice it to say there is nobody, and certainly no government, that can anticipate the trillions of transactions occurring on a daily basis and “manage” a national economy.

I’m NOT an economist so if that’s important to you then read no further. It could be that the free market evaporated a long time ago when the Great Depression caused the government to start meddling with Smith’s utopian dream. It could be that the free market slipped away even more when the currency was divorced from precious metals. But now, we have the government buying up companies, guaranteeing an onerous flow of capital, and purchasing the private assets of citizens who can’t pay for them. Forget about a free market, what does all of that eventually mean to individual freedom? 

Most people who have lived long enough, or studied economics 101, know that if you spend more than you earn there will come a time when everything you earn is owed and you don’t have anything left to live on. The “bailout” bill that was just NOT PASSED in Congress (yesterday at 5 p.m. EDT) had a provision to allow Congress to increase the national debt to $11 trillion. Later on, the text of the bailout plan made it clear that the cost of the bailout plan was NOT INCLUDED in the $11 trillion. Okay, so let’s round it up to 12 trillion. That’s about $40,000 for each American (310 million, Mas, Pas, Gram, Pap and kids …everybody is included). 

Here are two potential truths I have observed: 

Societies based upon consuming may have short lives because rather than adding value they are devouring it.

Governments will always tell the citizens only what they need to tell them.

In looking at historical building permit data from 1960 to this year it is possible to see patterns that may predict future events. Back in February I did a post explaining the historical patterns of the nation’s building permit volumes and based upon what I saw I extrapolated that the building permits would have to fall below 800,000 before housing recovery might begin. Here is some of the text from that post just to give you a bit more background.

First, it may surprise some to know that in December of 2007 the number of building permits issued dipped below the number issued in January of 1960. But what is more interesting is that the numbers of building permits issued quarterly have only exceeded two million during just two periods since 1960. One period was from July 1971 through March of 1973 and the other was from March 2004 through March 2006.

If you look at the numbers of building permits issued after each of those periods you see a gradual, followed by steep decline. In April 1973 the number dipped below two million, rebounded a bit to top two million, and then dipped once again before finally going into a free-fall to bottom-out at 709,000. That whole process took 20 months before permits started climbing again.

Beginning in April 2006 permits dropped below two million, and with the exception of a couple of up-ticks inched downward until reaching a little over a million in January 2008.

The number of housing building permits issued in the 48 years from January 1960 to January 2008 has never dropped below 709,000, and whenever the numbers did hit rock bottom they did it in the 700s. In November of 1966 it was 736,000, in March of 1975 it was 709,000, in October of 1981 it was 731,000, and in January of 1991 it was 786,000.

Well, the numbers for August are now out and after spending the past six months mostly in the 900,000 to million range they have dropped to 854,000. This could be a signal that the market is finally diving to its bottom.  Or, it could also mean the theory doesn’t hold water. Time will tell.

It’s certainly understandable in the day-to-day workings of building things that an accurate accounting of where money is spent becomes challenging. But this article refers more to the relative costs of various parts of a structure than to just tracking the bottom line.

Leopardo Construction did a detailed analysis of some of its projects to try to find out just what was taking the most money relative to the various building components.

In looking at just the interior construction cost it found out that nearly 50 percent of the total costs were for things in the walls, floors and ceilings. For example:

• 24-26 percent went on electrical
• 9-11 percent went to HVAC
• 4-6 percent was spent on plumbing and fire protection
• 3-5 percent went for communications and security

While all of those things are definitely building essentials some question the amount of the total budget they take up and see there may be some opportunities to find more money for things like aesthetics and design, since those are the things that offer more instantly visible rewards. To many it comes down to closer scrutiny of those line items and also a willingness on the parts of owners and architects to involve the builders early on.

There is much more on this topic, and more, in a newly released white paper by Leopardo that delves into ways to help ease the pain of the continuing higher materials costs that many are predicting will be around for some time to come.