Construction Forecasts

News & Analysis

New Residential Construction Spending Continues to Improve

05/22/2012 by Bernard M. Markstein, RCD US Chief Economist

New residential construction spending advanced a strong 2.8% on a seasonally adjusted (SA) basis after falling 0.8% in February. Single-family construction spending jumped 3.8% following a 1.3% drop in February. Multifamily construction spending was down 1.8% after advancing 1.7% in February. On a year-to-date basis, both single-family and multifamily construction spending were up from the same period last year, 8.4% and 8.1%, respectively.

Single-Family Housing
The Census Bureau’s report on April housing starts provided good news for both single-family and multifamily housing. April single-family housing starts advanced 2.3% to 492,000 at a seasonally adjusted annual rate (SAAR). March single-family starts were revised up from 462,000 to 481,000, and January and February starts were revised up as well. This is the first reading where the effects of unseasonably warm winter weather in much of the country no longer appear to be distorting the numbers. It also is an indication of a slightly better tenor to the housing market. Single-family starts have been at or above 460,000 starting in November of last year, the highest they have been since April 2010.

Meanwhile, April single-family building permits at 475,000 were at their second highest level in two years. The three-month moving average for permits of 473,000 marked their highest level since May 2010.

Another positive indicator for the single-family housing market comes from the May NAHB/Wells Fargo Housing Market Index (HMI), which rebounded from April’s dismal reading of 24 to 29, just above February’s and March’s 28 and its highest level in five years. Further, all three underlying indexes that make up the HMI (indexes for current sales, current traffic, and expected sales) increased in April.

Multifamily Housing
April multifamily starts rose 3.2% to 225,000 (SAAR) and March’s starts number was revised up from 192,000 to 218,000. More instructive given multifamily starts’ volatility, April’s three-month moving average of 230,000 is the highest average since November 2008. Further, April’s three-month moving average of multifamily building permits at 257,000 is 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. For example, Bank of America recently announced a program to reduce the principal on up to 200,000 mortgages in default as part of a settlement with the government over alleged foreclosure-related abuses.

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 where foreclosures are no longer (or never were) a major problem. 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 improving economy, stronger hiring, low mortgage rates, and rising consumer confidence are all positives for housing and residential construction.

The forecast is for new residential construction spending to increase 10.2% in 2012 and 8.2% in 2013.

Residential Construction Data

  Monthly Figures (1)
(latest actual values)
3-Month
Moving Average
Actual Forecast
  Feb-12 Mar-12 Apr-12 Feb-12 Mar-12 Apr-12 2008 2009 2010 2011 2012 2013
Northeast Starts 66 87 69 67 76 74 121 62 72 68 79 91
  Month-over-Month % Change -10.8% 31.8% -20.7% -13.7% 12.4% -2.2%            
  (Year-over-year % change of NSA data) 22.6% 38.0% 19.2%       -15.3% -48.9% 15.9% -5.3% 16.8% 14.3%
Midwest Starts 99 119 127 128 108 115 135 97 98 101 114 130
  -6.6% 20.2% 6.7% 1.3% -15.4% 6.5%            
  61.3% 45.8% 38.6%       -35.8% -28.0% 0.8% 3.3% 12.8% 14.0%
South Starts 419 345 385 383 389 383 453 278 298 308 393 431
  4.0% -17.7% 11.6% 7.0% 1.5% -1.5%            
  36.4% 0.7% 36.9%       -33.4% -38.6% 6.9% 3.4% 27.6% 9.6%
West Starts 134 148 136 133 140 139 196 117 120 133 142 183
  -2.2% 10.4% -8.1% -8.7% 4.7% -0.2%            
  50.8% 27.6% 17.0%       -38.9% -40.5% 2.7% 10.5% 7.5% 28.3%
Total Starts (2) 718 699 717 712 712 711 906 554 587 609 728 834
  -0.3% -2.6% 2.6% 0.5% 0.1% -0.1%            
  40.4% 15.0% 31.0%       -33.2% -38.8% 5.9% 3.8% 19.6% 14.5%
Total Single-family Starts 470 481 492 500 487 481 622 445 471 431 496 559
  -8.0% 2.3% 2.3% 0.7% -2.6% -1.3%            
  21.1% 10.7% 21.5%       -40.5% -28.4% 5.9% -8.6% 15.1% 12.7%
Total Multifamily Starts 248 218 225 211 225 230 284 109 116 178 233 275
  18.7% -12.1% 3.2% 0.0% 6.5% 2.4%            
  98.9% 26.5% 62.8%       -8.3% -61.6% 6.2% 54.1% 30.4% 18.3%
New Home Sales (3) 353 328 NA 341 337 NA 485 375 323 302 322 356
  7.3% -7.1%   3.1% -1.3%              
  27.3% 14.3%         -37.5% -22.7% -13.9% -6.5% 6.7% 10.6%
Manufactured Home Shipments 62 58 NA 60 60 NA 82 50 50 52 66 77
  1.7% -7.2%   -3.6% 1.1%              
  43.3% 15.8%         -14.5% -39.3% 0.7% 3.1% 27.9% 16.3%
     Residential Construction Spending (Billions Current $)      
New Single-family 112.6 116.9 NA 112.5 114.5 NA 185.8 105.3 112.6 106.7 118.1 126.8
  -1.3% 3.8%   1.1% 1.8%              
  9.1% 10.2%         -39.1% -43.3% 6.9% -5.2% 10.6% 7.4%
New Multifamily* 23.4 23.0 NA 23.1 23.1 NA 51.2 35.9 23.7 22.1 23.9 26.8
  1.7% -1.8%   0.7% 0.2%              
  10.5% 8.8%         -8.1% -30.0% -34.0% -6.6% 7.9% 12.4%
New Residential** 136.0 139.9 NA 135.6 137.7 NA 237.0 141.2 136.2 128.9 142.0 153.6
  -0.8% 2.8%   1.1% 1.5%              
  9.4% 10.0%         -34.3% -40.4% -3.5% -5.4% 10.2% 8.2%
Residential Improvements*** 113.5 111.3 NA 117.2 114.2 NA 120.7 112.7 112.5 116.6 113.9 118.1
  -3.8% -1.9%   -2.2% -2.5%              
  -0.5% 2.4%         -13.5% -6.6% -0.2% 3.7% -2.3% 3.7%
Total Residential**** 249.5 251.2 NA 252.7 251.9 NA 357.7 253.9 248.7 245.5 255.9 271.8
  -2.2% 0.7%   -0.5% -0.3%              
  4.9% 6.7%         -28.5% -29.0% -2.1% -1.3% 4.2% 6.2%

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.


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