BLOG VIEW: When trying to sift through the smoke and mirrors, spin and so forth as to whether we are headed for another housing downturn, you might want to research the ‘Skyscraper Index.’
While attending a default servicing industry conference recently, my good friend, Laureen Trent, of Trent Realty, suggested that the economy is running on the Skyscraper Index. Not being familiar with the term, I decided to surf the net to find out what she meant.
One site where you can get information on the Skyscraper Index is Mises Daily, which is published by the Ludwig von Mises Institute. There, you will find a recent interview with Mark Thornton, a senior resident fellow at the institute and book review editor for the Quarterly Journal of Austrian Economics. He is also the author of numerous books on economics and economic theory.
In the interview, Thornton explains that the Skyscraper Index, which was created by economist Andrew Lawrence in 1999, is a correlation between the construction of the world's tallest buildings and economic busts. Thornton's point is that the impact on the economy is such ‘that the structure of production is reoriented toward much longer run and more roundabout production processes. Record-setting skyscrapers, therefore, generally require an enormous amount of new technological processes and systems that all require their own production, distribution, installation and maintenance.’ This, according to Thornton, is analogous to an economy in artificial boom.
Further, Thornton suggests that an increase in the amount of investment and consumption and a decrease in personal savings are general symptoms that can be correlated to this theory.
‘This means that balance sheets of businesses become somewhat more leveraged; therefore, many companies become more susceptible to failure,’ Thornton says during the interview. ‘With skyscrapers and related markets, there is a large increase in capacity, namely, the amount of office space and related services means that expected future prices are unlikely to be achieved and, therefore, expected profits will not be achieved and losses will increase.’
Thornton proffers that his first article on the Skyscraper Index was published back in 2005, with the housing bubble as the first test. In 2007, he identified the completion of the Burj Khalifa Tower, a record-setting skyscraper in the United Arab Emirates, as a potential signal that a crisis was looming.
Thornton explains that once a boom turns to bust, the existing resources to produce new, extremely tall skyscrapers greatly exceed the demand, and, thus, profit margins are squeezed for the surviving construction and materials firms.
Now, I am not suggesting that this particular theory supports my belief that we are headed for another housing downturn. But to relegate me as merely a ‘skeptic,’ as was suggested in the lead story of a recent Mortgage Bankers Association e-newsletter, or to discount Lawrence's theory out of hand is sheer folly. The Skyscraper Index, Voodoo Economics and many other economic theories have their supporters and detractors. But I ask, are these theories any less believable than the constant spinning by special interest groups and trade organizations about the "good news" regarding the health and future of the housing market?
I, for one, think not.
The top 10 skyscrapers currently under construction around the world include seven in China alone, including the Shanghai Tower, which will become the world's tallest building at 2,073 feet. However, the Kingdom Tower being erected in Jeddah, Saudi Arabia, to be completed in 2018, is going to be a staggering 3,280 feet.
It will be interesting, indeed, to see if Lawrence's theory holds up.
Lynn Effinger is a veteran of the mortgage servicing industry. He currently serves as executive vice president of field services company ZVN Properties Inc.