November 2010 U.S. Construction

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Overall construction spending in the United States increased by a seasonally adjusted and annualized rate of 0.4 percent during November, to $810.2 billion. The only category to experience a decline was private non-residential construction, which decreased by 0.1 percent.
 

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Apparently, most of the private residential spending referenced above went into brand-new projects (as opposed to those that have been underway for several months), because the number of total housing starts rose while completions fell.
 

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Total starts have been bumping along what we have dubbed the “background activity” level, averaging about 572,000 starts since January 2009. There seems to be a floor of 500,000 units, below which starts have fallen only twice during the past two years.
 

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The pace of new-home sales picked up in November, rising 5.5 percent relative to October. Even so, the ratio of starts to sales continued to mount; since starts include all building activity regardless of motivation, whereas sales measure only those homes built on a “speculative” basis (i.e., not on contract initiated by the eventual occupant), the rising starts-to-sales ratio may imply that a sizeable proportion of homes coming “on line” are being built under contract.
 

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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 also rose in November, returning to levels comparable to early 2009. With the uptick in existing home sales, new homes continue to decline as a proportion of total sales.
 

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Although existing home prices have been trending downward since July, 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 November. 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. Falling home prices are a two-edged sword: While they make housing purchases more affordable, in a perverse way they also discourage those purchases: Why buy a home if there is a high likelihood that continued price erosion will quickly wipe out whatever equity the buyer has in the home?

As if to drive home that point, the seasonally adjusted S&P/Case-Shiller home price indices retreated almost across the board in October. Only Denver and Washington, D.C. saw modest advances relative to September. Most metropolitan statistical areas (MSA) have seen prices erode on a year-over-year basis as well.
 

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David Blizter, chair of the Index Committee at Standard & Poor's, was quite crestfallen during the most recent press conference. “The double-dip [in housing] is almost here, as six cities set new lows for the period since the 2006 peaks. There is no good news in October’s report. Home prices across the country continue to fall.” Blitzer said. “The trends we have seen over the past few months have not changed. The tax incentives are over and the national economy remained lackluster in October, the month covered by these data. Existing homes sales and housing starts have been reported for both October and November, and neither is giving any sense of optimism. On a year-over-year basis, sales are down more than 25 percent and the months’ supply of unsold homes is about 50 percent above where it was during the same months of last year. Housing starts are still hovering near 30-year lows. While delinquency rates might have seen some recent improvement, it is only on a relative basis. They are still well above their historic averages, in both the prime and sub-prime markets.”
 

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