Unsustainable Construction Boom Costs SoCal up to $29 Billion

You may note that my headline is somewhat different from the following headline and those differences are important.

October 23, 2010
Construction slump costs SoCal $29 billion

The Construction Industry Research Board reported in 2006 that residential construction alone (not counting Commercial or Public Works) contributed almost $40 billion of business activity to our region’s economy. In 2009 – just three years later – the number shrunk to just under $11 billion. That is almost $30 billion of economic activity lost in our region, and demonstrates how construction is an important economic engine that Southern California cannot afford to shut off.

In order for the construction slump to have cost southern California $29 billion, we'd first need to believe that the $40 billion in business activity was actually sustainable. Was it? Here are two arguments that might show otherwise.

1. There are 24.2 million people living in southern California. $40 billion per year represents roughly $1,650 per man, woman, and child per year. Over the course of 30 years, that would amount to $50,000 per man, woman, and child dedicated to *new* residential construction.

Here's one problem with the $50,000 math. California already has 13.4 million housing units (with roughly 2/3rds of them in southern California no doubt). Just how many more are/were actually needed?

Here's another problem with the $50,000 math. Those who already own homes have no interest in funding the construction of homes for those who do not own homes. That means the $50,000 figure is FAR too low. And when I say far too low, I mean the actual number would knock your socks off.

Here's yet another problem with the $50,000 math. $50,000 for every man, woman, and child already represents a whopping $150,000 per family of three (every 30 years)! And it is far too low? Seriously?

The math clearly shows that $40 billion per year is therefore not even remotely sustainable long-term. This is actually the weaker of my two arguments though. The following argument is 100% objective.

2. Hindsight. Was $40 billion per year sustainable? Hindsight shows not!

I would therefore argue that it wasn't the slump that cost southern California money. It was the unsustainable boom that was guaranteed to bust. The "missing money" was borrowed and spent on castles built on sand. When the tide came in that money vanished and left a giant debt hole in its place.

Construction slump costs southern California $29 billion? Oh please! Stop already! Economics should not be a comedy routine!

But what would we expect Rich Lambros (the CEO of the Building Industry Association of Southern California) to say though? Biased comedians abound!

October 23, 2010
Home Prices Double Dip in "Sudden Dramatic Drop"; 20% More to Come says Gary Shilling

Video: Gary Shilling says single-family home prices will drop another 20% over the next few years with number of homeowners underwater to rise from 23% to 40%.

What can be done about the problem? Rich Lambros would suggest that we need to build more homes clearly while simultaneously figuring out a way to prop up their prices. Good luck on that one!