New-home slump casts big shadow over state

Not long ago, Minnesota home builders led the way out of recessions with placards that read, "Now Hiring." This year, facing a potential recession that already may be underway, industry watchers see little chance of that happening -- a dark portent for the state economy far beyond construction sites.

During the last two recessions -- one seven years ago, the other 17 -- home-building jobs bounced back earlier and more energetically across Minnesota than they did across the nation. From March through November 2001, Minnesota home builders turned in an astonishing performance. They hired more workers each and every month of a national economic downswing.

This time around, Minnesota home builders have few incentives to be heroes in the job market in the face of a brake on sales that started almost two years ago, said Pam Perri Weaver, executive vice president for the Builders Association of Minnesota.

"Never have they been in an environment where interest rates are 5.5 percent and residential home building is not rising," Weaver said.

Said state economist Tom Stinson: "Even though interest rates are low by historical standards, you still have to convince people to borrow money to buy an asset that may be going to continue to decrease in value for a year or more."

By some measures, home building represents a small part of the state job market.

Direct employment in home construction represents a tiny sliver of a Minnesota job market that numbers nearly 3 million. The average of 14,280 workers pouring concrete, swinging hammers, stringing wires and laying pipes in new Minnesota homes last year represent only one of every 205 workers in the state.

Yet home builders now are at the epicenter of an industry with widespread economic reverberations.

"This is a sector that, all of a sudden, has enormous leverage on the rest of the economy," Stinson said.

"It's affecting the free flow of credit," he said. "Not just credit for housing but credit for all kinds of activities."

No bottom in sight

With a subprime credit debacle that surfaced in 2007 spreading to banks and the bond market this year, forecasters eagerly await a bottom in the housing market but are wary of predicting when it will come.

"I was more optimistic a year ago that we would come out earlier than the rest of the nation," Stinson said.

Many believe the spreading fears in the credit markets won't ease until the prices of existing houses stop dropping and inventories of unsold homes decline.

Meanwhile, consequences of a housing slump spread through the Minnesota economy in many ways: fewer sales of lumber products, paint, windows and other housing-related goods. These industries claim a greater share of workers in Minnesota than in the nation as a whole.

In the past, that dominance helped explain why Minnesota's housing-related industries were early-in and early-out of U.S. home-building slumps.

"Minnesota supplies the United States with lots of materials used to build homes," said Toby Madden, regional economist at the Federal Reserve Bank of Minneapolis.

Orders for house components often are made months before construction starts, and cancellation orders come months before house projects are abandoned.

"You'd expect Minnesota to lead the nation into housing downturns and also housing expansions," Madden said.

Falling home prices and stalled construction have become a nationwide phenomenon, with once-hot markets such as Las Vegas, Miami and Los Angeles leading the decline.

Another reason Minnesota's home-building industry held up well in the last two recessions -- and may be more vulnerable now -- was that the state's population was growing at its fastest pace in decades, said Steve Hine, director of labor market information at the Minnesota Department of Employment and Economic Development.

"We were a magnet state," with job and population growth that outpaced the nation in many industries, he said.

In recent years, that advantage has eroded. "As our unemployment rate has approached the national unemployment rate, that magnetism has been reduced," Hine said.

Rottlund Homes began ratcheting down building 16 months ago, said Michael Noonan, division president.

Rottlund has been tentative about investing, even in the face of glimmers of a market bottom. It's concentrating, he said, on just four projects where at least half of the existing inventory has been sold.

"We're seeing some pace of business that would justify a strategic investment that would bring a building into the market ahead of what we would have done 16 months ago," Noonan said.

But cautious investments in new housing projects continue to be the rule.

Consider Tappe Construction, an Eagan company that provides carpenter crews for home builders. It recently started hiring, increasing its employment to 225, from about 180 last fall, said Michael Tappe, company president.

Tappe doesn't see a rapid return to past payroll numbers, which peaked at 425 in August 2005.

"We're planning our business level at current volumes through spring 2010," he said.

Mike Meyers • 612-673-1746