Why Is Construction Spending Important to the Economy?
Why Did Construction Spending Fall in February?
Construction spending
Each month, the U.S. Census Bureau releases its Value of Construction Put in Place survey. It measures the total dollar value of construction work in the US.
In the quarter ending December 31, construction spending as a percentage of the GDP (gross domestic product) rose to 6.2%. This was a big rise from a year ago when it stood at 5.8%. Over the past 50 years, the average has been closer to 8.4%. So, we’re still well below historical averages. Take a look at the above chart and note the fall in construction spending as a percentage of the GDP. You can clearly see the drop-off after the housing bubble burst.
In many ways, this represents pent-up demand. It isn’t just from the private sector through commercial and residential construction. It’s also public construction. You’ll hear the “crumbling infrastructure” argument a lot from politicians, especially Democrats like Hillary Clinton and Bernie Sanders.
The other issue that politicians are discussing is the need for affordable housing. Tight inventory makes it difficult for people to afford rentals. Rental inflation has been moving up steadily, especially in urban areas. The government just informed landlords that they aren’t allowed to deny apartments to convicted felons.
Homebuilders are changing their demographic focus
Homebuilders like Lennar (LEN) and CalAtlantic (CAA) didn’t build enough after the housing bubble burst. Many were afraid of being caught with inventory and land, so they held back. They only build what they’re reasonably confident they can sell. We haven’t seen builders take more risk yet, but the inventory problem is becoming so acute that the risk-to-reward ratio may be too good to ignore. In some hot markets like San Diego, California, there’s less than two months worth of inventory.
Given the well-known problems with the first-time homebuyer—student loan debt, a tight job market—builders focused more on the move-up and luxury buyer. Toll Brothers (TOL) has been focusing more on luxury urban apartments. The Millennial generation avoids single-family residences in the suburbs for upscale urban locations.
Builders with more of an entry level focus, such as PulteGroup (PHM) and D.R. Horton (DHI), are beginning to focus more on the lower price points in anticipation of the return of the first-time homebuyer. Investors who want to bet on the sector as a whole could look at the SPDR S&P Homebuilders ETF (XHB).
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