April 2010 U.S. Construction: Cautiously Positive

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The value of construction spending jumped in April by 2.7 percent (compared to March), the biggest one-month improvement since August 2000.

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Private residential construction improved the most on a percentage basis (4.4 percent). Home construction has been helped by home buyer tax credits, but the durability of that recovery remains to be seen now that the tax credit expired at the end of April.

Public construction spending came in second place with a 2.4 percent increase. State and local spending increased 2.3 percent and federal spending rose 2.9 percent. This category has been helped by the government's economic stimulus program, but those projects are starting to wind down.

Private nonresidential construction rose 1.7 percent, the first advance since March 2009. April’s stength came from gains in private sector work on communications projects and power generation facilities. Construction of office buildings and the category that includes shopping centers fell in April.

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Turning to the private residential component, rising consumer confidence and the expiring home buyer federal tax credit mentioned above boosted most metrics of housing activity in April.

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Total starts rose to 0.672 million in April – a 5.8 percent jump from March. Although still well below the troughs of previous retreats, total starts are nearly 41 percent above year-earlier levels (which also corresponded to the low point of the latest downturn).

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Most (88 percent) of the increase in starts occurred in the single-family component. Because of the lack of activity in the multi-family component, the National Association of Home Builders attributes some of the increase in starts in April to “builders rushing to begin and ultimately complete modest homes in time to qualify for the home buyer tax credit” at the end of June.

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Sales of new single-family dwellings also rose for the second consecutive month in April, to 0.504 million. That means starts were only 20 percent higher than sales, which is quite remarkable when considering that the Census Bureau counts a “sale” only when a “spec” home is sold – homes built under contract are excluded.

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Although single-family completions ticked higher (to 0.504 million), the jump in new-home sales helped pull the inventory of unsold homes lower in both absolute terms and months of inventory. The absolute level of single-family inventory has not been this low (0.211 million units) since late 1970; only five months would be required to clear that backlog of inventory – the lowest level since late 2005 – at the current sales rate.

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Existing home sales also rose in April. The National Association of Realtors (NAR) attributed the increase to “buyers motivated by the tax credit, improving consumer confidence and favorable affordability conditions.”Lawrence Yun, NAR’S chief economist, said the 7.6 percent gain was widely anticipated. "The upswing in April existing-home sales was expected because of the tax credit inducement, and no doubt there will be some temporary fallback in the months immediately after it expires, but other factors also are supporting the market," he said. "For people who were on the sidelines, there's been a return of buyer confidence with stabilizing home prices, an improving economy and mortgage interest rates that remain historically low."

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The median price of new homes sold fell 9.7 percent in April, primarily because of large jumps in the number and proportion of lower-priced homes; over half of the homes sold in April were priced below $200,000.

By contrast, the affordability of existing homes was undercut for a third consecutive month by another uptick (2.1 percent) in the median price. Interestingly, the trend in NAR’s median price appears to be diverging once again from that of the 10-city S&P/Case-Shiller home price index.

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Retreats in the 10- and 20-city composite indices picked up speed in March (the latest data available) because only six metropolitan statistical areas (MSA) showed month-to-month price gains.

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“The housing market may be in better shape than this time last year; but, when you look at recent trends there are signs of some renewed weakening in home prices,” said David Blitzer, chair of Standard & Poor’s Index Committee. “In the past several months we have seen some relatively weak reports across many of the markets we cover. Thirteen MSAs and the two Composites saw their prices drop in March over February…The National Composite fell by 3.2% compared to the previous quarter and the two Composites are down for the sixth consecutive month.

“While year-over-year results for the National Composite, 18 of the 20 MSAs and the two Composites improved [improvement here appears to include declining more slowly than in the past], the most recent monthly data are not as encouraging. It is especially disappointing that the improvement we saw in sales and starts in March did not find its way to home prices. Now that the tax incentive ended on April 30th, we don’t expect to see a boost in relative demand.”