Construction Spending Shows Housing Growth

by: Markos Kaminis

Construction Spending data was reported Tuesday and was embraced and propagated by real estate agents and housing longs. However, your sometimes hated, typically post-profit loved, and always critically analytical blogger here finds good reason to temper enthusiasm. That said, there are interesting trends developing in housing and other construction sectors.

Construction Spending was reported 1.2% higher in November, exceeding economists’ expectations for a 0.5% increase. “Woo hoo,” exclaimed the once high flying mortgage broker now working at Home Depot (NYSE: HD) in order to make the electric bill. “Alright,” declared the Ryland Group (NYSE: RYL) sales representative whose hours have been cut to part-time, and who delivers pizza on the side. “Jump on it,” announced the reporter/stock-picker whose ratings climb on sensationalism.

Yours truly, however, has another view, and considering the unbiased nature of that view, it might be worth noting. Taking a closer look at the economic report produced by the U.S. Census Bureau Tuesday, we find that the growth reported for November benefited tremendously from a revision to the prior month result. Initially noted for 0.8% growth, October’s construction spending was revised significantly downward, now showing a 0.2% decrease in activity. Well, when you cut the base of your growth calculation, you are certain to get better growth than what economists based their forecasts upon.

Now, the shares of homebuilders rallied significantly on the news, with builders Hovnanian (NYSE: HOV) and PulteGroup (NYSE: PHM) jumping 6.9% and 3.3%, respectively. K.B. Home (NYSE: KBH) climbed 3%, while D.R. Horton (NYSE: DHI) and Toll Brothers (NYSE: TOL) rose 2.9% each. Beazer (NYSE: BZH) rose 2.4% and Lennar (NYSE: LEN) edged higher 1.2%.

In the past I’ve noted multi-family home growth, and have warned that it is not a good sign for the economy to generate a nation full of Pottersville renter suckers. However, this report shows good growth in single-family home construction, which was up 1.5% in November, though on a seasonally adjusted basis. In fact, looking at the trend of the past five months we see a generally improving market.

Eventually, new home construction was going to have to improve, driven by lack of supply after a period lasting so long with so little new construction. The population continues to grow, hard working immigrants enter the market on job offers, and home demand creeps higher. What has kept this natural driver from making an impact for so long has been the usual suspects: the foreclosure overhang of existing homes for sale cheaper than new homes; tight lending standards keeping once approvable buyers out of the market; plus a good number of more recent buyers sitting on underwater mortgages. Eventually, though this was going to be absorbed, and perhaps we are starting to see some of that finally. My concern of late, which has affected my view for housing, is a macroeconomic stumbling block I see ahead driving new recession and holding up a housing recovery.

Multi-family construction also increased 1.3% in November, and so Potter’s slums continue to find new suckers. The five-month trend for the multi-family segment is also one depicting increasing demand, though in a less fluid manner. On a year-to-year basis, new single family home construction was up 2.5%, while multi-family projects were up 4.1%. It’s here where you can more clearly see the damage to home ownership in this difficult economic hangover and the beneficiary, the multi-family segment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.