June 2010 U.S. Construction: Treading Water

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Overall construction spending nudged higher (0.1 percent) in June thanks to help from the public component (mainly highways and other infrastructure projects). Both subcomponents of private construction declined. The annual percentage rate of decline in total construction spending continued to slow, however, and stood just shy of -8 percent.

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As indicated by the value of construction put in place, total housing starts fell by 5 percent in June -- the lowest level since November 2009. Most of the decrease occurred in the multiple-family component, which declined by 21 percent. Although total starts are up over 15 percent over their April 2009 bottom, they remain nearly 76 below the peak of January 2006.

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Even with the increase in sales of nearly 24 percent, builders started and completed more houses than are being sold. In June, single-unit starts exceeded sales by almost 38 percent, while completions were more than double the sales rate.

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Apparently many of the recently completed homes were built on contract (rather than on a speculative basis by the builder), because the higher sales rate caused the overhang of new homes to decline in both absolute and months-of-inventory terms. I.e., a number of homeowners took possession of the keys to their new homes even though those transactions were not considered “sales.” Completions are tallied for all homes, regardless of the reason for construction whereas sales are tallied only for “spec” homes. Were completions and sales tallied on a truly comparable basis, we would have expected completions to drive inventory higher in June.

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Although new home sales picked up by a respectable percentage, such was not the case for home resales; sales of existing homes declined by 5.1 percent. The combination of slowing sales from the expiration of the federal tax credit and banks putting more foreclosed units on the market bumped up the inventory of existing homes by nearly 100,000 units and raised the months of inventory by 0.6 month (to 8.9 months). Despite the fallback in home resales, new home sales still comprised only 5.8 percent of total home sales in June -- less than half the normal historical average of roughly 15 percent.

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Interestingly, even with the retreat in home resales, the National Association of Realtors’ (NAR) median existing home price shot 5.2 percent higher (to $183,700) in June. Affordability has suffered as a result. NAR’s nationwide median home price has been trending in the same direction as the S&P/Case-Shiller home price composite indices since March. Only five of the 20 individual markets covered by the Case-Shiller data experienced price declines in May (the latest data available), and six are lower on a year-over-year percentage basis.

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“While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery,” said David Blitzer, chair of the Index Committee at Standard & Poor’s. “Since reaching its recent trough in April 2009, the housing market has really only stabilized at this lower level. The two [composite indices] have improved between 5 and 6% since then, but this is no better than the improvement they had registered as of October 2009. The last seven months have basically been flat.”

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Looking forward, Blitzer indicated that “there may still be some residual impact from the homebuyers’ tax credit, since they affect any purchase that closes through June 30. We need to watch where the housing markets will go after these temporary stimuli go away. June’s existing and new home sales and housing starts data do not show much real improvement in those statistics either. It still looks possible that the housing market might bounce along the bottom for the foreseeable future, before showing any real improvement that will filter through to the rest of the economy.”

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Updated data from Robert Shiller shows that real, inflation-adjusted existing home prices had been reverting to the long-term historical trend in place between 1946 and 1997 (i.e., prior to the housing boom) until the combination of the Home Affordable Modification Program, foreclosure abatements, and the federal homebuyers’ tax credit “kicked in” beginning in early 2009. The effectiveness of those programs is wearing off, however, and so we expect home prices to begin reverting to the trend yet again. That said, more recent affordability data from NAR suggests that real prices could levitate at least through 2Q2010 before succumbing to the inevitable.

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The number of vacant homes in the United States is another reason why we believe falling home prices are inevitable. About 18.9 million homes stood empty during 2Q2010, and the ownership rate (i.e., households that own their own residence) fell to 66.9 percent -- the lowest rate since 1999. “There are a lot of people losing their homes and either moving in with family or renting places to live,” said Patrick Newport, an economist with IHS Global Insight. “Foreclosures are still going up.”