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Why Did Construction Spending Disappoint in March?

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Part 2
Why Did Construction Spending Disappoint in March? PART 2 OF 5

Construction Spending Rose in March: What Does It Mean?

Construction spending rose in March

Construction spending rose to a seasonally adjusted annual rate of $1.14 trillion in March from $1.13 trillion in February. Spending rose 8% YoY (year-over-year). Private construction rose 1.1% and public construction fell 1.9% month-over-month.

Construction Spending Rose in March: What Does It Mean?

Public construction was depressed during the recovery. Federal, state, and local governments had budgetary issues with low tax receipts and high social spending commitments. Recently, this seems to be turning around. Private construction rose 8.5% YoY. Residential construction was up 1.5% month-over-month. It rose 7.6% YoY. Also, non-residential private construction rose 8.3% YoY. Construction hiring is still a bright spot in the economy. We saw steadily increasing construction hiring in the last few job reports.

New housing construction is finally starting

Construction spending is just off its post-recession high, but it’s still depressed. The current levels equate with the spending levels in early 2008. Construction spending peaked at $1.2 trillion in March 2006. It bottomed out in February 2011 at $746 billion.

Multi-family construction has been growing much faster than single-family residences. The inventory remains tight, vacancy rates remain low, and the Millennial generation is choosing to stay in urban environments.

Homebuilders such as Lennar (LEN), PulteGroup (PHM), Toll Brothers (TOL), and D.R. Horton (DHI) won’t be immune to competition from new rental housing. That said, rent is rising rapidly. This could push consumers to look at buying.

Renting versus buying

The first-time homebuyer is stuck with a better value proposition in buying versus renting. Purchasing isn’t always possible due to new guidelines from the Consumer Financial Protection Bureau.

The debt-to-income ratios tend to be higher for younger adults because they’re usually carrying student loan debt. The federal government is working to help the first-time homebuyer get access to credit, but a tough job market and the unwillingness of lenders to step outside of the qualified mortgage box make it difficult. Investors can participate in the homebuilding sector through the SPDR S&P Homebuilders ETF (XHB).

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