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New Residential Construction Spending Rises in December02/27/2012 by Bernard M. Markstein
New residential construction spending rose 1.2% in December after advancing 1.9% in November. Single-family construction spending rose 1.5% in December, its seventh consecutive monthly increase, after a 1.7% increase in November. However, multifamily construction spending slipped slightly, down 0.2% in December following a 2.7% increase in November.
Overall, the housing market has shown slow but steady improvement. In the past, residential construction has been one of the key engines pulling the nation out of recession. This time around, it is the nation’s growing economy that is helping to pull housing out of its deep recession. But just as the decline in housing helped push the nation into recession, which in turn sent the housing market down further creating a negative feedback effect resulting in a downward spiral for both, there is now a positive cycle beginning to emerge as the improving economy helps revive the housing market and the resulting residential construction activity helps the economy.
For three and a half years, from first quarter 2006 through second quarter 2009, residential construction detracted from economic growth an average of 1% a quarter. Over the year and a half from fourth quarter 2009 through first quarter 2011, residential construction added to economic growth in only two quarters. However, in the last three quarters of 2011 residential construction contributed to the nation’s growth, if only modestly. That contribution should grow over the next few years as housing continues to recover.
Signs of improvement in housing are evident in the housing starts data. Single-family housing starts have generally been trending upward for the last nine months. December and January starts were above 500,000 at a seasonally adjusted annual rate (SAAR), the first time they have been above that mark since April 2010.
The higher starts may be partially due to the seasonal adjustment process inflating the numbers as the mild winter in much of the United States has permitted more than normal construction activity. More compelling looking forward is single-family building permits, which have risen in nine of the last eleven months and in January, at 445,000 permits, stood at their highest level since April 2010. Although the permits number is also at a seasonally adjusted annual rate, permits are less affected by weather conditions, making the seasonally adjusted numbers more reliable when weather conditions vary significantly from the historical norm.
Another positive indicator for single-family construction is the NAHB/Wells Fargo Housing Market Index (HMI), which has risen for five consecutive months and now stands at its highest reading since May 2007. The HMI has proved to be a good indicator of the direction of housing starts in the short run.
Sales of existing single-family homes have generally been rising over the last few months. January’s sales of 4.05 million (SAAR) is the highest sales number since May 2006.
Finally, sales of new single-family houses, although hardly stellar, were above 320,000 (SAAR) in December and January, a level last seen briefly in December 2010 and consistently prior to May 2010. Also, the inventory of new homes for sale at 151,000 set another record low for the measure since current record keeping began in 1963. Meanwhile, the number of households in the U.S. has more than doubled since 1963. Clearly any sustained uptick in demand for single-family housing will translate rapidly into additional residential construction activity.
Lest this positive outlook be viewed as a return to normal conditions in single-family housing, it is clear that the nation is far from there. Even if recent single-family housing starts continue to move upward, they are well below the 1.0 million to 1.15 million starts per year that even the most pessimistic analysts believe the country needs over the long term (10 years or longer) based on demographics and replacement requirements. The HMI February reading of 29 is far from the neutral reading of 50. Anything below 50 is considered contractionary. Existing home sales are at least one million below what most analysts would consider a normal level and new home sales well over half a million below their normal level.
Although the process of working through the foreclosure problem is now in its last phase, the problem is not over and more properties will be foreclosed on this year. Also, there are still a large number of foreclosed properties on the market that need to be sold before we truly put this mess behind us. This will act as a drag on the single-family housing market, limiting the increase in sales of new homes, and hence in construction activity.
Multifamily starts have stumbled a bit of late, but this is a volatile measure. The three-month moving average smoothes out most of the volatility. The January moving average of 204,000 starts (SAAR) is the second highest reading since October 2008. Meanwhile, January’s three-month moving average of multifamily building permits of 235,000 is the highest it has been since November 2008.
Outlook for Residential Construction
The outlook for multifamily construction spending remains positive. Continued low interest rates, falling vacancy rates, and rising rents bode well for multifamily construction. As already noted, we also expect continued slow recovery in single-family construction. The improving economy, stronger hiring, low mortgage rates, and rising consumer confidence are all positives for housing and residential construction.
The forecast is for new residential construction spending to increase 7.5% in 2012 and 8.0% in 2013.
Residential Construction Data
|Monthly Figures (1)
(latest actual values)
|Month-over-Month % Change||50.0%||-34.4%||7.9%||21.7%||1.8%||1.8%|
|(Year-over-year % change of NSA data)||38.2%||5.0%||-27.6%||-15.3%||-48.9%||15.9%||-5.3%||12.5%||16.1%|
|Total Starts (2)||702||689||699||659||673||697||906||554||587||609||708||819|
|Total Single-family Starts||458||513||508||439||469||493||622||445||471||431||497||551|
|Total Multifamily Starts||244||176||191||220||204||204||284||109||116||178||211||268|
|New Home Sales (3)||318||324||321||310||318||321||485||375||323||302||322||353|
|Manufactured Home Shipments||69||56||NA||60||60||NA||82||50||50||49||58||69|
|Residential Construction Spending (Billions Current $)|
Housing starts, home sales, and manufactured home shipments are all in thousands.