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New Residential Construction Spending Continues to Improve

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New residential construction spending rose 1.7% on a seasonally adjusted (SA) basis after jumping 3.2% in March.

New residential construction spending rose 1.7% on a seasonally adjusted (SA) basis after jumping 3.2% in March. Single-family construction spending increased 1.8% following a 4.2% surge in March. Multifamily construction spending was up 1.2% after falling 1.6% in March. On a year-to-date basis, both single-family and multifamily construction spending were up from last year, 9.8% and 9.3%, respectively.

Single-Family Housing
The Census Bureau’s report on May housing starts was generally positive despite a 4.8% (SA) drop in total housing starts. May single-family housing starts advanced 3.2% to 516,000 at a seasonally adjusted annual rate (SAAR) and April single-family starts were revised up to 500,000 from 492,000. Single-family starts have been at or above 460,000 for the past seven months and at or above 500,000 for four of the last six months. Meanwhile, May single-family building permits were up 4.0% to 494,000, their highest level since March 2010.

Another positive indicator for the single-family housing market comes from the June NAHB/Wells Fargo Housing Market Index (HMI), which inched up a point to 29, after jumping four points in May. The June HMI is its highest reading since May 2007.

Multifamily Housing
May multifamily starts fell 21.3% to 192,000 (SAAR). However, April’s starts number was revised up from 225,000 to 244,000. More instructive given multifamily starts’ volatility, May’s three-month moving average of 218,000 was down a more modest 7.9% from April. On the positive side, May’s three-month moving average of multifamily building permits at 279,000 was up 7.3% from April and was their highest reading since October 2008.

Outlook for Residential Construction
The housing market continues to face serious, though diminishing challenges. The number of foreclosures is on a slow downward trajectory. The number of delinquent mortgages is falling, indicating the inflow of new foreclosures is decreasing. More lenders now recognize the benefit of negotiating with a borrower either prior to default or in default, working out a reduction in principal or agreeing to a short sale rather than pursuing a foreclosure.

Meanwhile, single-family builders must compete with the downward price pressure from the sale of foreclosed properties and short sales in several markets. However, housing prices in many metro markets have stabilized. Most of the premium foreclosed properties that were available for sale in the early days of the foreclosure crisis are long gone. At this point, most foreclosures available for sale are more modest homes and/or in poor condition. Banks and other lenders have been easing their lending standards a bit for builders and buyers, though hardly to the standards that analysts would characterize as normal (i.e., the type of standards that prevailed before the housing bubble).

Overall the outlook for multifamily construction spending remains positive. Continued low interest rates, falling vacancy rates (first quarter vacancy rate of 8.8% was the lowest rental vacancy rate since second quarter 2002), and rising rents underlie our forecast for multifamily construction. The forecast for single-family construction is for continued anemic recovery. The growing economy, continued hiring, low mortgage rates, and slightly easier mortgage lending standards are all positives for housing and residential construction.

The forecast is for new residential construction spending to increase 13.6% in 2012 and 12.0% in 2013. This forecast is up from last month’s 10.2% and 8.2%, respectively, due to a more positive outlook for housing, especially for single-family construction. This improved outlook was influenced by better than expected April construction spending numbers and some upward revision in the February and March numbers. However, note that relatively small changes in spending produce large changes in percentage increases due to the low base. Although improving, the nation is still far from a return to a fully normal housing market.

Residential Construction Data

  Monthly Figures (1)
(latest actual values)
3-Month
Moving Average
Actual Forecast
  Mar-12 Apr-12 May-12 Mar-12 Apr-12 May-12 2008 2009 2010 2011 2012 2013
Northeast Starts 87 79 63 76 77 76 121 62 72 68 78 91
  Month-over-Month % Change 31.8% -9.2% -20.3% 12.4% 2.2% -1.3%            
  (Year-over-year % change of NSA data) 38.0% 32.7% 12.5%       -15.3% -48.9% 15.9% -5.3% 14.6% 16.5%
Midwest Starts 119 128 111 108 115 119 135 97 98 101 118 134
  20.2% 7.6% -13.3% -15.4% 6.8% 3.5%            
  48.5% 39.8% 9.3%       -35.8% -28.0% 0.8% 3.3% 16.5% 13.8%
South Starts 345 391 367 389 385 368 453 278 298 308 396 437
  -17.7% 13.3% -6.1% 1.5% -1.0% -4.5%            
  0.7% 39.4% 37.1%       -33.4% -38.6% 6.9% 3.4% 28.7% 10.2%
West Starts 148 146 167 140 143 154 196 117 120 133 151 193
  10.4% -1.4% 14.4% 4.7% 2.1% 7.7%            
  27.6% 25.5% 26.0%       -38.9% -40.5% 2.7% 10.5% 13.9% 27.7%
Total Starts (2) 699 744 708 712 720 717 906 554 587 609 742 854
  -2.6% 6.4% -4.8% 0.1% 1.1% -0.5%            
  15.0% 35.9% 26.5%       -33.2% -38.8% 5.9% 3.8% 21.9% 15.0%
Total Single-family Starts 481 500 516 487 484 499 622 445 471 431 513 588
  2.3% 4.0% 3.2% -2.6% -0.8% 3.2%            
  10.7% 23.3% 23.7%       -40.5% -28.4% 5.9% -8.6% 19.1% 14.4%
Total Multifamily Starts 218 244 192 225 237 218 284 109 116 178 229 266
  -12.1% 11.9% -21.3% 6.5% 5.2% -7.9%            
  26.5% 77.9% 35.1%       -8.3% -61.6% 6.2% 54.1% 28.4% 16.3%
New Home Sales (3) 332 343 NA 343 344 NA 485 375 323 302 352 405
  -7.3% 3.3%   -0.7% 0.4%              
  14.3% 10.0%         -37.5% -22.7% -13.9% -6.5% 16.6% 15.1%
Manufactured Home Shipments 58 52 NA 60 58 NA 82 50 50 52 63 73
  -7.2% -9.2%   1.1% -4.8%              
  15.8% 17.4%         -14.5% -39.3% 0.7% 3.1% 21.3% 16.2%
     Residential Construction Spending (Billions Current $)      
New Single-family 117.4 119.4 NA 114.7 116.5 NA 185.8 105.3 112.6 106.7 122.2 136.7
  4.2% 1.8%   2.0% 1.5%              
  10.5% 13.0%         -39.1% -43.3% 6.9% -5.2% 14.5% 11.9%
New Multifamily* 23.3 23.6 NA 23.4 23.5 NA 51.2 35.9 23.7 22.1 24.2 27.2
  -1.6% 1.2%   0.7% 0.8%              
  10.4% 9.8%         -8.1% -30.0% -34.0% -6.6% 9.3% 12.5%
New Residential** 140.7 143.0 NA 138.0 140.0 NA 237.0 141.2 136.2 128.9 146.4 163.9
  3.2% 1.7%   1.7% 1.4%              
  10.5% 12.4%         -34.3% -40.4% -3.5% -5.4% 13.6% 12.0%
Residential Improvements*** 115.1 119.3 NA 117.2 117.6 NA 120.7 112.7 112.5 116.6 119.6 125.0
  -2.9% 3.6%   -1.4% 0.4%              
  3.7% -2.1%         -13.5% -6.6% -0.2% 3.7% 2.6% 4.5%
Total Residential**** 255.8 262.3 NA 255.2 257.7 NA 357.7 253.9 248.7 245.5 266.0 288.8
  0.4% 2.6%   0.3% 0.9%              
  7.5% 5.1%         -28.5% -29.0% -2.1% -1.3% 8.3% 8.6%

Housing starts, home sales, and manufactured home shipments are all in thousands.
(1) Monthly figures are seasonally adjusted at annual rates (SAAR figures).
(2) Total starts may not equal sum of regions due to rounding.
(3) Based on a survey of homebuilders; excludes homes built under contract and multi-family rental units.
* New Multifamily = New Private Multifamily + New Public Multifamily - Public Improvements (estimated by Reed Economics)
** New Residential = New Single-family + New Multifamily
*** Residential Improvements include remodeling, renovation and replacement work.
**** Total Residential = New Single-family + New Multifamily + Residential Improvements.
Total Residential may not equal the sum of its components due to rounding.
Number also includes RCD estimate of improvements to public housing.
Source: Census Bureau, U.S. Department of Commerce. Forecast: Reed Construction Data.

by Bernard M. Markstein

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