Construction Spending Increases: Will It Subside?

 |  Includes: ITB, IYR, LPS, RWR, RWX, XHB
by: John Lounsbury

Driven primarily by residential construction, spending on construction increased in April, according to the report from the U.S. Census Bureau. Private non-residential construction was up 2.0% from March, but down 16.1% from April last year. Private residential construction was up 4.5% from March and 4.6% from a year ago. Public construction numbers were stronger than the private sectors. Private construction is 65% of the total.

Calculated Risk provides the following graph that shows the private construction data going back to 1993:

For large image, click here.

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Two things to note:

  1. The increase in residential construction is probably supported by the latest Federal income tax credit for home purchase which requires completion and closing on or before June 30; and
  2. Thus far, the increase in construction spending is less than experienced in 2009 for the previous income tax credit program.

There is widespread concern that residential construction spending may subside after a rush to build for the tax credit ends. If that is to be the case, the effect may be seen as early as June as construction winds down in front of the close out of the tax credit window. The month of July will definitely show the effect, if there is to be one.

The biggest headwind to growing the new housing construction numbers is the number of distressed sale properties (short sales and foreclosures) that will still be coming to market in the future months. Lender Processing Services (LPS) reported yesterday that there are still more than 7 million homes in the severely delinquent (over 90 days) status, including REO properties. REO stands for real estate owned (foreclosure completed by the bank). The number of such homes decreased slightly from March (-1.6%), but the proportion of delinquent homes progressing further in the foreclosure process increased. Fewer delinquent homes were finding remediation.

LPS has reported that the average duration of occupancy after foreclosure proceedings have started is 438 days. Also, 19% of homes 18 months or more in arrears are still occupied by the delinquent mortgagor. This indicates that the workout from this big inventory of troubled mortgages may take years rather than months.

Disclosure: No positions.