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 United States.
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In the quarter ending June 30, construction spending as a percentage of GDP slipped to 6.1%. This was a small increase from a year ago. Over the past 50 years, the average has been closer to 8.4%. Thus, we’re still well below historical averages. In the above chart, note the fall in construction spending as a percentage of GDP. You can clearly see the drop-off after the housing bubble burst.
In many ways, this represents pent-up demand. It isn’t just from the private sector through commercial and residential construction. It’s also public construction. You’ll hear the “crumbling infrastructure” argument a lot from politicians, especially Democrats such as Hillary Clinton. Private construction spending provides a healthy stimulus to the economy. The lack of private construction spending has been a weak spot in the economy.
Public construction spending has been declining as a percentage of GDP ever since the stimulus plan in 2009 slowed down. That said, public construction spending as a percentage of GDP was at a 30-year high not too long ago.
The other issue that politicians are discussing is the need for affordable housing. Tight inventory makes it difficult for people to afford rentals. Rental inflation has been moving up steadily, especially in urban areas. The government just informed landlords that they aren’t allowed to deny apartments to convicted felons.
While there’s debate over whether the multiplier for public construction spending really exists, there isn’t any debate that private construction spending is a big boost for the economy.
Homebuilders like Lennar (LEN) and CalAtlantic Group (CAA) didn’t build enough after the housing bubble burst. Many were afraid of being caught with inventory and land, so they held back. They only build what they’re reasonably confident they can sell. We haven’t seen builders take more risk yet, but the inventory problem is becoming so acute that the risk-to-reward ratio may be too good to ignore. In some hot markets such as San Diego, there’s less than two months’ worth of inventory.
Given the well-known problems with the first-time homebuyer—student loan debt and a tight job market—builders focused more on move-up and luxury buyers. 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.
Builders with more of an entry-level focus, such as PulteGroup (PHM) and D.R. Horton (DHI), are beginning to focus more on the lower price points in anticipation of the return of the first-time homebuyer. Investors who want to bet on the sector as a whole can look at the SPDR S&P Homebuilders ETF (XHB).