Construction Spending Has Been Falling as a Percent of GDP
Each month, the United States Census Bureau releases its “Value of Construction Put in Place” survey. It measures the total dollar value of construction work in the US.
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In the quarter ending March 31, construction spending as a percentage of the GDP was flat at 6.2%. This was a big rise from a year ago when it was 5.7%. Over the past 50 years, the average has been closer to 8.4%. So, we’re still well below historic averages. Take a look at the above chart and note the fall in construction spending as a percentage of the GDP. You can clearly see the drop-off after the housing bubble burst.
Affordable housing is a huge problem
While problems with the first-time homebuyer are well known—a difficult job market and student loan debt—affordable housing is still a huge problem. Many builders want to focus on building entry-level housing. However, regulations remain a challenge. The issue is that the amount of regulations and taxes instituted over the past ten years increased the cost of building so much that it’s difficult to build starter homes that are affordable for their intended demographic. The regulations include everything from city and local taxes, to lower density regulations, mandatory open spaces, and trails. Cities and counties can impose fees of $50,000–$100,000 per unit. This makes it difficult to build homes that can be offered below $250,000—the typical entry-level price point.
In the latest Case-Shiller report, seven MSAs hit new highs and most were in expensive areas like San Francisco and San Diego. Tight inventory is a big contributing factor.
Some builders are reaching out to the first-time homebuyer
There are really only two publicly traded homebuilders that have a line targeting the first-time homebuyer—PulteGroup (PHM) and D.R. Horton (DHI). Both companies are situated in markets with lower real estate prices. Homebuilders like Lennar (LEN) and CalAtlantic (CAA) are more West Coast centric. It’s almost impossible to build homes that sell for less than $500,000 in places like San Diego. Investors who want to bet on the sector as a whole could look at the SPDR S&P Homebuilders ETF (XHB).
Toll Brothers (TOL) has been focusing more on luxury urban apartments. The Millennial generation avoids single-family residences in the suburbs for upscale urban locations.