Friday, November 18, 2011

Home Construction Will Be Muted - Bad News for Logistics Providers

I think we have all learned over the last few years why home construction is always looked at by economists.  It is probably the single biggest indicator of the health of the economy.  When people buy homes all sorts of things happen:

  1. Construction materials are bought
  2. People are employed en masse
  3. Peripherals are purchased (appliances, lights, drapes etc.)
  4. Landscaping is performed...
I do not know the exact number but my guess is after someone buys a $200K house they most likely, over the next year, spend another $20K at least on "stuff".

This drives all sorts of logistics activities - warehousing and most importantly, transportation volume.  Transportation is inbound into the manufacturing plants which gear up for the activity and outbound finished goods going to all those new homes.

OK, now we know why this is so important.  This is also why it is depressing to hear home construction will be muted for a while - most likely 5 -8 years. The inventory is just too high and there are still a lot of adjustable rate mortgages to reset in 2012.  Not a good sign.

For those of you who say, "Yes, but those staying in a home will remodel" I would say this "rule" (if it ever was one) does not hold up anymore.  The reason is most people, intuitively, know they are now living in a depreciating asset and not an appreciating asset.  Remodeling makes sense in the latter as it is much like a bank account.  However, in the former remodeling is like buying a consumable product which has no sustainable value.  People know this intuitively and will not, in total, increase dramatically their major remodeling (assuming they are sane and rational).

Sorry to be the bearer of bad news.


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