May 2010 U.S. Construction: Serious Setbacks in Residential Starts and New-home Sales

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Following two months of gains, construction spending dipped in May as residential building slowed -- concurrent with the demise of the federal homebuyers' tax credit. The 0.4 percent rise in public construction spending (mainly highways and other infrastructure projects) was insufficient to offset the 0.5 percent drop in private spending, resulting in a 0.2 percent overall decline.

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The drop in private residential construction was concentrated in the single-family section (-17.2 percent, the largest monthly retreat since January 1991). Total starts are up 24.3 percent from their trough in April 2009, but still off by 73.9 percent relative to the peak of January 2006.

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The impact of the tax credit’s expiration was most evident in new home sales, which “cratered” by nearly one-third in May – falling to a new record-low level of only 300,000 units (seasonally adjusted and annualized rate, or SAAR).

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Despite a modest decrease in the absolute number of unsold homes, the fall-off in sales caused the months of inventory to bolt upward from 5.8 months in April to 8.5 months in May. Resales of homes, townhouses, condominiums and co-ops also retreated in May, but nowhere near as dramatically (-2.2 percent) as new homes.

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New home prices “fell off a cliff” after March (the median price dropped by $22,500 between March and April), and now stand 9.6 percent below year-earlier levels. The median price of existing homes, by contrast, has been rising since February. Much of that rise is attributable to seasonality – prices typically rise during the middle of the year, but even the S&P/Case-Shiller home price index showed a modest increase.

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Miami and New York were the only markets in which home prices fell between March and April (the latest data available). Prices in more than half the markets were higher than during April 2009; also, year-over-year increases were typically larger on a percentage basis than the decreases in declining markets.

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The slight uptick in composite prices may be only temporary. “Home price levels remain close to the April 2009 lows set by the S&P/Case Shiller 10- and 20-City Composite series,” said David Blitzer, chair of the Index Committee at Standard & Poor’s. “The April 2010 data for all 20 metropolitan statistical areas (MSA) and the two Composites do show some improvement with higher annual increases than in March’s report. However, many of the gains are modest and somewhat concentrated in California. Moreover, nine of the 20 cities reached new lows at some time since the beginning of this year. The month-over-month figures were driven by the end of the Federal first-time home buyer tax credit program on April 30th. Eighteen cities saw month-to-month gains in April compared to six in the previous month. Miami and New York were the two that fared the worst in April compared to March. New York is the only MSA to have posted a new relative index low with April’s report.”

“Other housing data confirm the large impact, and likely near-future pullback, of the federal program,” Blitzer continued. “Recently released data for May 2010 show sharp declines in existing and new home sales and housing starts. Inventory data and foreclosure activity have not shown any signs of improvement. Consistent and sustained boosts to economic growth from housing may have to wait to next year.”

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If recent history is any indication, private residential fixed investment is unlikely to contribute significantly to GDP in the near futures. Part of the reason for this turn of events, according to Moneynews.com, is that developers are trying to sell a glut of homes built during the boom years. And they must compete against foreclosed homes selling at deep discounts. As a result, new home sales made up about 7 percent of the housing market last year (5 percent in May), down from about 15 percent before the bust.

Each new home built creates the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders. The impact is felt across multiple industries, from makers of faucets and dishwashers to lumber yards, but it has weakened in recent years. Spending on residential construction and remodeling made up only about 2.4 percent of GDP in 1Q2010, down from a peak of more than 6 percent during the housing market's boom years.

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