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Economy in Brief

by Bob Brusca U.S. Construction Spending is RISING! Fancy that! May 31, 2007

OFHEO says house prices are rising too!

Construction spending rose by just 0.1% in April but the March increase was revised to be stronger. Private spending fell, led by a 1% drop in residential that in turn is led by a drop-off in multi-family building. Private nonresidential spending is still on a strong rising trend. Public spending is expanding at a steady and strong pace. Private residential spending is contracting, but the pace of contraction is slowing – a key and now clear developing trend. Is it time to break out the bubbly? Or is it still a bubble?

From May 2005 the growth rate of private residential spending has been ebbing. Its pace of decline accelerated in March of 2006 but around October of 2006 the rate of descent slowed. The Yr/Yr drop was its largest in the 12-month period ended in December 2006, at -19%. In April 2007 the Y/Y decline is ‘only’ 12.7%. With that, the steady erosion of the growth rate of spending has ended; in its place is an erosion of the pace of decline. The residential market is in a noticeable state of repair; it is not further deteriorating although there are still declines being posted. The pace of deterioration is gradually slowing. And so the unraveling is not gaining pace. The horror story of a housing meltdown is being debunked.

The table of growth rates shows the progress (below). For all sectors except residential, construction growth in the private sector is advancing and for some sectors, quite strongly. Overall private spending is actually UP at a 9.4% annual rate over the recent three-months. While that turn into positive territory may not have staying power, we think it is an authentic harbinger of improvement in the sector.

Construction spending did not rise sharply in April. But the revision to March coupled with April’s bump up has considerably improved the trends in the sector.

Add to that the RISE in the OFHEO (Office of Federal Housing Enterprise Oversight) house price index and the prospects for sector are not looking as grim as many portray them. OFHEO reported today that the US rate of home price appreciation remained slow but positive in the first quarter of 2007. The OFHEO House Price Index (HPI), based on data from sales and refinance transactions, rose 0.5 percent compared to the fourth quarter of 2006. This is a moderate deceleration from the revised growth of 1.3 percent for house prices from the third to the fourth quarter of 2006. Prices in 2007-Q1 were 4.3 percent higher than they were in the same quarter in 2006. OFHEO Director James B. Lockhart said this: "Although some forecasters expected to see a drop in the HPI, nationwide house prices continued to rise in the first quarter of 2007, albeit at the lowest rate in 10 years. As always, real estate prices are local with seven states showing double-digit annual appreciation rates and seven with rates less than 2 percent. Seven states, including Florida and California, also showed home price depreciation in the first quarter." Lockhart might have added that while home prices are rising slowing, the inflation rate is low, a factor that encourages slower price increases for many products and asset classes in the economy, including housing.

Clearly the housing market still has its weak spots. But news on housing is of the usual sort: there is a salaciousness bias. Bad news gets reported before good news. Worse news gets multiplied coverage. When an objective assessment of house prices finds that conditions are not as bad as the media hounds’ bay maybe its time to muzzle them? At the very least it’s a good time to look at the DATA yourself and see what the facts are instead of how they are being (mis?) represented. All interested parties! Time to go to your spread sheets. Look at the data, not the wire services, the newspapers or the economists with an ax to grind and a forecast of weakness to justify. The truth will not just set you free, it just might rekindle some optimism.

Construction Put In Place
  Percentage Change as Noted  
  1-Mo 1-Mo saar 3-Mo 6-MO Yr/Yr Share
Total 0.1% 1.0% 8.1% 1.5% -2.0% 100.0%
Private -0.1% -1.3% 9.4% -2.0% -5.2% 75.5%
Residential -1.0% -11.5% -1.1% -12.2% -14.4% 47.3%
Lodging 4.5% 69.1% 153.8% 62.8% 51.4% 2.4%
Office 0.7% 8.7% 12.3% 31.8% 30.9% 4.4%
Commercial 1.5% 20.2% 37.4% 17.3% 13.5% 7.1%
Transport 1.9% 25.7% 21.6% 60.0% 3.4% 0.8%
Communication -0.4% -4.2% 30.9% 23.1% 21.0% 1.5%
Power 2.5% 33.8% 31.7% -9.2% 1.3% 2.7%
MFG 3.9% 58.8% 30.9% 23.1% 11.2% 3.5%
Other -0.7% -8.2% 6.9% 8.4% 7.9% 5.8%
Public 0.7% 8.6% 4.2% 13.6% 9.4% 24.5%
Highway 0.3% 4.1% 3.6% 12.8% 7.8% 6.8%
Sewer 1.6% 21.3% -12.9% -7.0% 8.0% 1.6%
Water -3.6% -35.8% -2.0% -0.2% 3.4% 1.1%
Other 1.1% 13.6% 7.0% 17.7% 10.8% 15.0%
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