Construction outlook dim

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The outlook for the construction business throughout the state deteriorated sharply in the last quarter of 2008, and the various stimulus programs are not likely to have much impact until after 2010, according to a forecast by the University of Hawaii Economic Research Organization.

Although the university economists took their gloomy September forecast down another couple of notches, they also warn in an update released today that "there remains considerable uncertainty" about the macroeconomic factors over the next two years. In other words, the worldwide economic system could continue to get worse.

On the bright side, housing affordability is rising and should rise more.

The report does not have a Neighbor Islands affordability index, but the Honolulu index should be broadly comparable.

The peak in prices was 2007, and the Oahu median single-family home price has shed about $75,000 since then.

The index combines the price of a house, the cost of borrowing and the median income of families. When a family with median income can just afford a median house, the index is set at 100. Lower is less affordable, and the index was down to 58 in 2007. The forecast calls for it to rise to about 79 this year and to stay in the 70s through 2011.

UHERO expects the median Oahu house price to shed another $25,000 by 2010.

By the last quarter of 2008, new construction, both residential and nonresidential, had fallen to about half of what it was the year before.

Because 2008 started out strong, the total year figures were up slightly to about $8 billion. That number conceals the collapse in the last few months of the year, and UHERO forecasts a nearly 20 percent additional drop this year - meaning about $1.5 billion less.

Statewide, single-family residential permits fell by 30 percent in the fourth quarter. In Maui County, permits issued fell by 63 percent in the third quarter and by 77 percent in the fourth quarter.

Housing prices in Hawaii have been more stable than in the rest of the country, although they began to fall faster as the year went on. The weakness in demand shows up more in the turnover: There were more than 20,000 transactions statewide in 2004 and again in 2005. Last year, only 10,000.

When 2008 began, commercial construction was vigorous and vacancy rates were low. By the fourth quarter, permits for new commercial projects were off by 80 percent. "Bank lending, which is the principal funding source for local companies, has suffered as well from falling collateral values, increasing default probabilities and generalized economic uncertainties," the report says.

It also notes that Hawaii-based banks are relatively less exposed to subprime mortgage losses than Mainland banks, "leaving them in better shape to make new mortgage loans." And, at least in the near term, interest rates will be favorable.

UHERO expects that this will put a floor under housing prices. It does not expect the fall in values to be as deep as in the mid-1990s. In that long slide, the affordability index rose as high as 103 early in 2001.

UHERO expects the decline in prices to be less than in the '90s.

Six months ago, UHERO had predicted $1.4 billion in new commercial construction in 2011. Now, it has slashed that forecast to $1 billion.

That means about 8,500 fewer construction jobs than in 2007 by 2012, with about 5,000 of those to disappear this year.

However, these base forecasts do not include two big but uncertain inputs - the Honolulu rail transit system and the state highway modernization program.

Both will cost billions, but neither will do much in the next couple of years. The rail system could provide as many as 6,000 jobs.

UHERO notes that the construction category that has lost the most jobs, carpenters, will not get much benefit from road and rail projects.

For 2009, UHERO predicts a total of $3.2 billion in new construction permits, which would be down $600 million from last year and down $1.5 billion from two years ago.

This will be distributed as $2 billion in private work (roughly equally divided between housing and commercial) and $1.2 billion in government contracts. (This leaves out the military's multibillion-dollar, 20-year housing program on Oahu, which does not require building permits.)

* Harry Eagar can be reached at heagar@mauinews.com.