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In my usual mornging scan of the MSM and the blogosphere news items, I come across this Shocker on Bloomberg: "Construction Spending in U.S. Increases 0.8% for Biggest Gain in a Year". I say to myself, "Oh, really???" Before we go into the story, I just want all to step into our common sense bubble for a few seconds. Given the rampant overbuilding, collapsed credit markets, high unemployment, and unprecedented foreclosure pipeline that competes DIRECTLY with home builders and sellers - all of which provides for large swaths of empty, and quasi-occupied apartment buildings, housing communities and projects - If you were in the business of real estate development, would YOU be buildining more housing right now? Just out of curiosity, do you really beleive that you are that much smarter than all of the other buildes that are posed with that decision? Okay, let's parse residential portions of this story...

 

Nov. 2 (Bloomberg) -- Spending on U.S. construction unexpectedly rose in September as residential builders rushed to finish projects in anticipation of a possible end to the first- time home-buyers tax credit.

The 0.8 percent increase, the biggest since September 2008, followed a revised 0.1 percent drop in August that was previously reported as a 0.8 percent gain, Commerce Department figures today showed. Spending on residential and government projects climbed, while outlays on private commercial construction slumped for a fifth consecutive month.

Low borrowing costs, price declines and the government’s $8,000 tax credit for first-time buyers stabilized sales and spurred the biggest increase in residential construction in 26 years in the third quarter. Lawmakers are working on extending the credit, which may help support construction even as commercial real estate falters.

“Residential construction continued its modest recovery from extremely depressed levels,” Steven Wood, president of Insight Economics LLC in Danville, California, said before the report. “However, non-residential construction remained in a downward spiral as vacancy rates were still climbing and rents were still falling.”

Economists forecast construction spending would fall 0.2 percent, after a previously-reported 0.8 percent gain in August, according to the median of 44 projections in a Bloomberg News survey. Estimates ranged from a drop of 1 percent to a gain of 0 percent.

Homebuilding Rebound

Private residential construction spending increased 3.9 percent in September, the biggest gain since July 2003, after a 3.8 percent increase the month before. Compared with a year earlier, it was down 27 percent.

Non-residential construction, including public projects, decreased 0.4 percent.

Public construction rose 1.3 percent, led by government spending on power plants, streets and highways and transportation projects.

Private commercial real-estate, which includes factories, hotels and office buildings, dropped 1.8 percent for a second month. The numbers are just the beginning of what will probably be a “huge crash in commercial real estate,” billionaire investor Wilbur L. Ross Jr. said Oct. 30.

‘Wrong Direction’

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.”

Commercial-property sales in the U.S. will fall to the lowest in almost two decades, according to data compiled by Real Capital Analytics Inc. in September.

The government is trying to prevent residential real estate from falling even more.

The Obama administration on Oct. 29 endorsed plans to extend the $8,000 tax credit for first-time homebuyers, saying it is helping stabilize the U.S. economy. The plan currently requires purchasers to close on their homes by Nov. 30.

The Senate’s new proposal would include a $6,500 credit for homebuyers who have lived in their prior residence for at least five years, Sen. Finance Committee Chairman Max Baucus said Oct. 29.

Less Inventory

Ryland Group Inc., a U.S. homebuilder catering to first- time buyers, said last week that its inventory of unsold homes dropped 30 percent in the third quarter compared with a year earlier and that its net loss narrowed.

The company is “in an excellent position” to profit when sales increase, Chief Executive Officer Larry Nicholson said on a conference call Oct. 29, a day after the company’s earnings release.

Meritage Homes Corp.’s home orders rose for the first time in three years during the quarter ended in September, the company reported Oct 26. Buyers ordered 1,098 homes in the period, up from 1,013 a year earlier. The builder reported a loss of $17.8 million for the quarter, compared with a loss of $144 million a year earlier.

Construction spending figures are based on expenditures over the life of a project, with about 75 percent of value accounted for in the first four months.

 

Thers is strong liklihood that the big developers are offering seller's concessions cloaked in confidentiality agreements that yield significantly optimistic sales prices in the city records (See In Condo Deals, a Weapon Called Fine Print). If this is the case, and it most likely is, then the numbers you see citing improvement very well may not be such. When one considers the new construction supply, the foreclosure pipeline supply, and plain vanillar existing sales combined with 10% unemployment, significantly tightened credit and the fact that new buildings are STILL going up, this makes plenty of sense. It also throws those Case Shiller numbers off a bit as well.