Overview: Construction spending for May 2014

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Part 2
Overview: Construction spending for May 2014 PART 2 OF 5

Must-know: Why construction spending increased in May

Construction spending increased 0.1% month-over-month in May

Construction spending increased to a seasonally adjusted annual rate of $956.1 billion in May from an upwardly-revised $955.1 billion in April. Spending is up 6.6% year-over-year (or YoY). Private construction fell 0.3%, while public construction increased 1% month-over month (or MoM). Public construction has been coming back recently. It’s now positive on a YoY basis. YoY, private construction is up 11.7%. Residential construction fell 1.5% MoM and is up 7.5% YoY. Non-residential construction is up 10.7% YoY.

Must-know: Why construction spending increased in May

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Construction spending is at post-recession highs, but it’s still depressed. That level equates to mid-2003 spending levels. Construction spending peaked at $1.2 trillion in March, 2006. It bottomed in February, 2011 at $746 billion. The report doesn’t break out single-family construction versus multi-family construction, so it’s hard to tell how this plays out for homebuilders. Multi-family housing starts are notoriously volatile. Homebuilders compete with rentals for new household formation, and as the supply of rental properties increases, rents should fall relative to house prices. This will negatively affect new home pricing at the margin. Homebuilders like Lennar (LEN) PulteGroup (PHM), Toll Brothers (TOL), and D.R. Horton (DHI), will feel the impact of an increasing rental property supply. Offsetting this effect will be the current low inventory level. Investors can participate through the S&P SPDR Homebuilder ETF (XHB).

Right now, the difference between renting and buying is heavily skewed in favor of buying. When you consider the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making homeownership very affordable. As the job market improves for younger adults, those who are currently renting will contemplate homeownership. The Obama administration has been pushing banks to lend more and to use Federal Housing Administration (or FHA) loans for first-time homebuyers. FHA loans require only 3.5% down payment, so they’re perfect for the first-time homebuyer. This move from renting to purchasing will help homebuilders over the longer term.


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