Construction Markets Perk Up

Private construction rose 0.4% in November to an annualized rate of $985 billion. This is the fifth consecutive month of increases, perhaps signaling that the relative stagnation in private construction is over. However, this conclusion applies only to the residential sector, which rose nearly 2% in November to an annual rate of $536 billion, and has been increasing over the last five months as shown in the chart below.

At the same time, non-residential has been declining, pretty much since February 2019, culminating in a 1.2% decline in November. It currently accounts for 46% of total private construction.

Regardless of the gains in construction activity over the last few months, spending for construction projects in 2019 is going to end up below the prior year’s level. Year-to-date through November, total private construction was 3.2% behind the corresponding period of 2018.

Residential Construction Stronger in Single-Family

Within the residential sector, November construction data reveals that its three components improved for the month, although spending on single-family home construction and remodeling projects has been increasing for the latest five months. Multifamily, on the other hand, has been declining over the same period.

This can be seen in the four left-side graphs in the combined chart below.

The right-hand side graphs display the annual percentage change for total residential construction as well as its three components. Spending for single-family houses in each month of 2019 was below the level in the corresponding month of 2018, even though the gap narrowed for the latest months and was virtually non-existent in November.

For multifamily housing, the story is nearly the opposite. During the first half of 2019, construction spending was above the prior year, but for the last three months ended in November, multifamily construction spending was below 2018 levels.

Trends in House Prices Settle

House price increases have stabilized over the last couple of months. While U.S. home prices were increasing at an annual rate of 6.4% in the first four months of 2018, the rate of increase reversed course and began to decline steadily through mid-2019, when it flattened at around 3.2%.

In the latest month of available data, October 2019, home prices were 3.3% above the prior year.

Housing prices are like a two-edged sword, however. Consumers benefit from lower house prices and smaller price increases because lower prices simply mean that more people are, or could be, able to afford to purchase a house. Naturally, on the flip side, higher home prices shut out some consumers from buying a home because they can’t afford it.

At the same time, however, consumers who already own a home benefit from higher house prices because of the increase in home equity they derive from the higher valuation of their homes. Thus, consumers’ real estate wealth rose at more than a 7% annual rate between 2014 and 2018, for a total increase of 31% in their real estate wealth over those four years. But the lower pace of home-price increases in 2019 has resulted in real estate wealth rising at just over half the pace maintained over the previous four years: that is, 4.2% in 2019 compared to the 7%-plus pace in previous years.

Some Metro Areas See Dramatic Declines in Home Prices

Regarding house prices, it’s well known that there are geographic differences in house prices and price inflation across the nation. The chart below displays the annual increase in single-family house prices over the last 25 months, for the 20 metropolitan areas tracked by market research firm Corelogic. Highlighted in different colors are the three areas with the highest home prices and most dramatic changes in the pace of house-price inflation.

While house prices in these three areas — Seattle, Las Vegas and San Francisco — were rising at a greater-than-10% pace annually through the first half of 2018, the pace of increases fell precipitously over the 12 months ended in October 2019. The deceleration of price increases resulted in actual declines in home price in Seattle during April and July of last year, and also declines for San Francisco in the latest three months.

The gray lines in the chart reflect home-price increases in the other 17 metro areas tracked by Corelogic. Although house-price inflation has also decelerated in these areas, the pace of price inflation in the earlier period, as well as the decline in 2019, are much milder.

Interest Rates Remain Stable

Mortgage rates eased very slightly last week, with the key 30-year fixed mortgage rate falling by two basis points to 3.72% from the previous week’s 3.74%. This rate has hovered around 3.7% for the last two months, remaining favorable toward house purchases or remodeling projects.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts.  This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $500,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers.

We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us at Feedback@nkba.org if you would like to see further detail.