The Economy's Effect on Construction Companies

If you're involved in the real estate industry, you likely know that the economic conditions of recent years have not been kind to this area of the market. Due to inventory fluctuation, tighter lending requirements and unstable market conditions, construction companies have had to adjust to a new economy. That's because, in the best or worst of times, the economy plays a big role in the overall health of the construction industry.

When the economy is booming, chances are construction company owners and managers don't need to worry too much about competition. When demand for construction is high, there is ample work to keep the industry going. However, in a downturned economy when fewer people and businesses have the capital or credit required to contract new construction, suddenly there is less demand for the same number of construction companies. Thus, competition increases, and construction businesses may find that it is harder to find work. Contractors may be forced to lower their prices in order to compete.

A strong economy, where employment rates are high and consumer spending is up, helps bolster all kinds of businesses. Since construction companies rely on suppliers for lumber, tools, glass and other materials and equipment, they are greatly affected when any of these businesses fail. Construction companies and construction suppliers have a circular effect on each other, and the state of the economy determines whether that effect is negative or positive. For example, in an economic downturn, fewer construction jobs mean less business for suppliers, which could drive prices higher or force suppliers out of business. When suppliers are out of business, construction companies may be forced to pay more for supplies, making it more difficult for them to stay afloat.

After the housing crisis of 2007 and 2008, the government imposed much stricter requirements on lenders. Due to this, fewer Americans were able to obtain the mortgage they needed to build a new home, and fewer investors were able to qualify for large construction loans. Without homebuyers and investors able to foot the bill for new construction, the construction industry suffered. In a downturned economy, lenders must be more careful when making loans, which affects the housing market -- and thus the construction industry -- at large.

When the economy suffers, America's buying power decreases, and defaults on loans rise. Many developers and construction companies operate their business on construction loans. For instance, a large homebuilder company might construct a new subdivision using borrowed capital. The company will pay this loan back as they sell the completed homes. However, in a downturned economy, there are fewer potential homebuyers in the market. With fewer buyers, construction companies may not be able to move their inventory quickly enough to pay their debts. This could lead to defaults, resulting in unfinished construction projects and foreclosures.