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Deutsche Bank Expects 1m More Job Losses in Residential Construction

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Despite absorbing significant layoffs in the past two years, additional job losses in the battered homebuilding sector are expected to continue, according to a report released by Deutsche Bank (DB) on Tuesday. The bank's economic research team, led by chief US economist Joseph LaVorgna, is estimating that roughly 1m construction and related workers will yet become unemployed. Roughly 1.4 million jobs have already been lost in the sector since peak employment in April of 2006. Deutsche Bank's LaVorgna suggests that the ratio of workers to output (housing starts) remains unbalanced. Until housing output began to collapse in 2006, the worker-per-start ratio remained steady at about 1.57. As the housing bust began, this ratio became significantly elevated and many workers have since lost their jobs -- but not enough yet to restore the ratio's balance. The current worker-per-start ratio stands at 3.8 (see chart below). This means that for every 3.8 residential construction workers, there is roughly one housing start at the current pace of building. Housing starts for July missed market expectations earlier this week, posting at 546,000 annualized pace. Residential homebuilding has lost an average of 10,000 jobs per month in 2010, an improvement compared to average monthly job losses of 43,000 in 2008 and 32,000 in 2009. Despite imbalances, Deutsche researchers said they expect homebuilding activity to rebound from current levels, which may mitigate potential job losses. "We would not be surprised to see job losses continue in this sector given the imbalances highlighted in the chart," LaVorgna writes. "However, we expect the cumulative decline from current levels to be considerably smaller, because we do not expect home construction to remain at such depressed levels through yearend." Deutsche Bank's assessment comes after a report by Capital Economics said last week that the US housing market faces an excess of market supply, into which homebuilders are adding. The economic analysis firm reported a 28% annualized jump in residential investment in the second quarter, alongside a 19% decline in housing starts from April to June. Homebuilding industry observers, however, see the situation differently. One observer, an analyst that requested anonymity, told HousingWire that there are actually few builders large or small that have construction workers that are actual employees, and that almost all workers are third-party contractors. This means that they cannot be "laid off" or "lose their job." They will just simply stop their work within the industry. On the other hand, full-time construction employees tend to be on the managerial level as supervisors and general contractors. If anyone in the construction industry were to lose their job, the source suggested, supervisors would be among the first let go. "All building firms are looking to cut selling, general and administrative expenses, which have already been drastically cut in the past two years," said the analyst. "General contractors are now being outsourced and consolidated on the community level by third-parties to work for their original builder." Consolidation is a trend that the homebuilding sector has seen gain momentum in recent years, as regional and large public builders look to merge with or be acquired by their competitors. A prime example is the PulteGroup (PHM)/Centex merger in mid-2009. Write to Christine Ricciardi.

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