October 2010 U.S. Construction

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Overall construction spending in the United States rose by $5.2 billion (0.7 percent), to a seasonally adjusted and annualized rate $802.3 billion during October. Nominal spending remains on par with levels first set back in 2000.

Most of September-to-October increase occurred because September’s spending estimate was revised downward by $4.6 billion; i.e., had September’s estimate remained unrevised, October’s growth would have been only $0.6 billion. That said, the increase was fairly broad-based. Only private non-residential construction spending fell in October.
 

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Private residential spending and the number of total housing starts marched to different drummers once again in October. Although spending increased, the number of units started plummeted to 519,000 (SAAR) -- a drop of 11.7 percent. That represents the fewest starts since a record low reached in April 2009 and 12 percent less than the downwardly revised estimate of 588,000 total starts in September. Most of the retreat resulted from a 43.5 percent drop in the number of multi-family units started. The number of total starts is 77 percent below the January 2006 peak, within 2 percentage points of the all-time low set back in April 2009.
 

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"Starts are a reminder of just how miserable the situation is in housing," said Chris Low, chief economist at FTN Financial in New York. "Sales have been so weak for so long that we continue to see starts bouncing along the bottom."
 

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New-home sales were also disappointing, falling by 8.1 percent. "Conditions in the housing market remain challenged," said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. "Lending conditions remain tight and there is concern that there's another down leg in home prices."
 

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Because sales are so depressed, even the slow rates of starts and completions are sufficient to keep the unsold inventory of new homes elevated. The number of months required to clear existing inventories has remained at/above eight months since April.
 

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Existing home sales reversed course in October, breaking a two-month run of increasing activity. There are two likely explanations for that turn of events: One is that the foreclosure mess has caused potential buyers to become wary of purchasing a foreclosed home for fear that possible legal conflicts might prevent them from obtaining clear title. The other is that foreclosed properties are being sold at such a large -- and growing -- discount (on average, 32 percent below the price of comparable homes not in the foreclosure process), buyers can sit on the sidelines waiting for more attractive offerings.

Because new home sales also declined, however, the proportion of total sales represented by new homes fell to 6 percent in October.
 

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Although existing home prices have been declining, they have not returned to the lows seen in early 2009 and again in early 2010. Nevertheless, the National Association of Realtors’ (NAR) housing affordability index rose to an all-time high in October. Of course, the median home price is not the only factor influencing affordability; mortgage rates and family incomes are also important variables in that calculation. Interest rates have been falling and incomes rising since early 2010.

The seasonally adjusted S&P/Case-Shiller home price indices have also been declining since July. That trend was particularly noticeable in September (the latest data available), as only Washington, DC posted a monthly gain.
 

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“Another weak report; weaker than last month,” was how David Blitzer, chair of the Index Committee at Standard & Poor's characterized the Case-Shiller indices for September. “The national index is down 1.5 percent from 3Q2009 and 15 of 20 cities are down over the last 12 months. Other than Tampa, FL, there are no new lows this month but many analysts will argue that a double dip will be confirmed before Spring. While some of the bad numbers may reflect the end of the government’s tax incentive for first time homebuyers, there are other problems weighing on the housing market. The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden, supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off.

“Looking deeper into the data, in the monthly indices, 18 MSAs and both Composites were down in September over August” Blitzer continued. This is worse than August when 15 were down month-to-month. The only two which weren’t down in September [on a seasonally unadjusted basis] were Las Vegas, which managed to stay a touch above the low set in July, and Washington DC. Overall, there are few, if any, good numbers in this month’s data.”
 

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