Volatile Construction Spending Reflects Declines In US Housing Wealth. The housing wealth of Minnesota single-family residential homeowners is up
Separate but related reports recently released by the U.S. Commerce Department, CoreLogic and Standard & Poor's/Case-Shiller on construction spending and the housing market. Residential construction spending is clearly still upward and the overall positive trend expected to continue. Destiny Homes, a luxury home builder serving Minneapolis and St. Paul real estate communities, helps homeowners make home improvements that increase their housing wealth.
"In short, a weaker than expected report. Still, data is extremely volatile and the trend in residential spending is clearly still upward." ~ said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.
Spending On Construction Of Residential Homes Increased
Not surprisingly, Twin Cities housing areas with larger shares of spending on upper-end discretionary projects also tend to have higher home values and equity levels. Spending on construction of single-family residential homes and apartments increased again, a hopeful sign for the modest housing recovery. Spending on residential construction fell 1.6 percent in July from June to a seasonally adjusted annual level of $264.6 billion. But that was dragged lower by a 5.5 percent decline in home improvement and remodeling projects, perhaps due to the decline in U.S. housing wealth.
Construction Spending Is Up Against Overall Economy Lows
Destiny Homes owner Butch Sprenger says, "Commerce Department reports, CoreLogic's price index report, and Standard & Poor's/Case-Shiller all carry the similar thread of housing increases. Used by the Federal Reserve, CoreLogic's price index is the third national index to show steady increases inspite of the recent dip. The Standard & Poor's/Case-Shiller index posted its first annual increase in nearly two years last week. That is remarkable given our overall economic state.
The Commerce Department said Tuesday that overall construction spending declined 0.9 percent in July. It followed three months of gains, which were driven by increases in home and apartment construction. The recent construction spending improvements have been widespread. Of 100 large cities CoreLogic tracks, only 23 cities posted year-over-year declines in July. On a positive note, that's four fewer than in June.
Areas where spending on construction was up:
* New single-family construction was up year-over-year by 20.8 percent
* Multi-family construction gained a 44.8 percent on an annual basis
* Construction spending on apartments increased
* Private construction projects were up 12.1 percent year-over-year
* Private residential projects gained 0.6 percent
Even with home prices up, areas showing less strength in construction spending were reported as follows:
* Spending on nonresidential projects fell 0.9 percent to an annual level of $294.1 billion.
* Spending on government projects dropped 0.4 percent to a level of $275.7 billion.
* Spending on state and local building projects fell 0.3 percent.
* Spending on federal construction projects was down 1.3 percent.
Destiny Homes takes a big picture view, noting that the current pace of construction spending and building activity, on a national level, remains significantly below historical norms. For example, the July 2012 total is just 42% of the residential construction spending total of July 2003. While the recovery in home building varies from location to location, it is stronger than average in Minnesota, and the overall positive trend is expected to continue into 2013.
Residential Homes Booms And Busts
The two largest sources of U.S. household wealth are derived from the U.S. stock market and the housing market. As we have all rode the waves, economist continue to interpret the housing market's sizable booms and busts in recent years. This volatility has influenced national consumption trends and had important consequences for homeowners and home sales tax payers. Some states have become relatively wealthier, affecting both the short- and long-term consumption spending potential of their respective residents. Looking at housing wealth on a national level, stock market and housing wealth account for more than three-fifths of all the wealth of households and nonprofits.
"Understanding how wealth changes affect state economies could be especially important in 2011 and 2012 given the recent resumption of home price declines in much of the country. Research has shown that consumption can be more sensitive to changes in housing wealth than other types of wealth," days Chad Wilson, a housing specialist.
Expectaion To See Continues Steady Improvement
Federal Reserve Chairman Ben Bernanke spoke last Friday to the National Association of Home Builders (NAHB) in Orlando. Bernanke illustrated the connection between home values and consumer spending, saying it fuels 70 percent of economic activity.
Then at the Economic Club of Indiana Monday, on the topic of low interest rates and hoping to encourage savers, Bernanke acknowledged, "Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Recent declines in housing wealth may be reducing consumer spending between $200 billion and $375 billion per year. That reduction corresponds to lower living standards for many Americans." Bernanke remains positive that we will see continued steady improvement in the housing sector.
CoreLogic's Expectaion To See Progressive Rebound In Minnesota Housing Wealth
Minnesota's August 2012 12-Month HPI showed a home price appreciation of 4.7 percent for homes including distressed properties and 4.9 percent if excluding distressed properties. National averages stand at 4.6 perenct and 4.9 percent respectively. “Sustained economic recovery in the U.S. requires a healthy housing market. You cannot have a healthy housing market without price stabilization and ultimately home price appreciation,” said Anand Nallathambi, president and CEO of CoreLogic. "Improving pricing trends over the past few months and our forecast for continued gains in September bode well for a progressive rebound in the residential housing market." State estimates of net housing wealth are made by subtracting an estimate of state mortgage debt from an estimate of gross state housing wealth.