Residential Construction Spending Surges on New Construction and Remodeling

Private residential construction spending jumped 2.8% on a month-to-month basis during September 2012. The preliminary estimates for July and August were revised higher as well, from previous prints of -0.1% and 0.9% to 1.3% and 1.2%, respectively. Nominal spending activity on private residential construction has expanded in 13 of the last 14 months, putting it nearly 21% above September 2011 and at its highest dollar value since the end of 2008.

The new single-family homes spending category saw growth accelerate in September, gaining 3.9% from the previous month and 26% from last year. Save for a one month downward blip in March 2012, construction spending on new single-family housing has increased solidly since last summer and risen more than 50% since hitting rock bottom during the second quarter of 2009. Data sources such as housing starts and NAHB’s own HMI continue to offer evidence that construction of new single-family homes is on the mend and given that building permits are at their highest level since mid-2008, construction activity is expected to rise for the foreseeable future.

Multifamily construction spending registered its 12^th consecutive month-to-month increase, gaining 1.3% over August 2012. Although the multifamily sector has posted the largest percentage increase in spending activity compared to its cyclical low (73%), the overall trend in spending growth has slowed in each of the last three months. While this might represent a lull, spending should continue to expand over the near term as multifamily starts have exceeded 200,000 units in 8 of the last 9 months and permits for 5+ units surged to a four-year high in September.

Nominal spending on home improvement activity increased 2%, more than recouping the 1.1% month-to-month drop that was reported in August. While remodeling has bounced around for much of the past two years, the level of spending activity has trended appreciably higher over the past few months and is now sitting at a 4-year high. Indeed, NAHB’s Remodeling Market Index (RMI) indicated professional remodelers’ perceptions of current market conditions are at their highest levels since 2005.

Remodelers’ Confidence Reaches Highest Point Since 2005

NAHB’s Remodeling Market Index (RMI) climbed to 50 in the third quarter of 2012, up from 45 in the previous quarter.  At 50, the RMI is at its highest point since the third quarter of 2005, tracking the positive trends recently seen in the rest of the housing sector.

The RMI measures professional remodelers’confidence in the market based on a quarterly survey that asks if various aspects of remodeling activity have gotten better or worse since the previous quarter.

The responses are aggregated into two major component indices.  In the third quarter of 2012, the major RMI component on current market conditions rose from 46 to 52, while the future indicators component increased from 44 to 49.  Each of the major RMI components is now higher than it has been at any time over the past six years.

Current remodeling activity was particularly strong in owner-occupied housing during the third quarter.  The sub-components of the current conditions index for owner-occupied housing were all well over 50, ranging between 55 and 60.

Although additions and alterations over $25,000 also showed considerable strength in the third quarter, they continue to lag behind smaller property alterations and maintenance and repair jobs.  The recovery of the remodeling market in general, and large projects in particular, is still facing constraints such as tight credit and problematic appraisals.

For more detail on all RMI components and subcomponents, along with their history, see NAHB’s RMI web page: http://www.nahb.org/reference_list.aspx?sectionID=136

Residential Construction Spending Rises in June

According to the Census Bureau, private residential construction spending increased for the third consecutive month in June, gaining 1.3 percent from an upwardly revised estimate for May 2012. The overall trend in private residential construction spending has been quite strong as the data expressed on a three-month moving average basis has risen in each of the last 9 months. With this month’s reading, nominal spending on private residential construction projects has reached its highest point since the beginning of 2009.

Construction spending on new single-family homes jumped 3 percent on a month-to-month basis and has staged nearly a 19 percent improvement from the same period a year ago. Moreover, since bottoming out during the second quarter of 2009, the nominal dollar value of spending on new single-family homes has climbed 38 percent. With both starts and permitting activity for new single-family homes still on the rise, additional gains in spending are expected over the very near term and should carry forward as the forecast calls for the pace of homebuilding activity to gain momentum as the calendar transitions to 2013.

Multifamily construction spending increased 3.4 percent during June and has experienced gains in each of the last 9 months. Overall, spending on new multifamily units has skyrocketed by 66 percent from its low point in August 2010. Construction activity is expected to level out over the remainder of 2012, but we anticipate multifamily starts to remain well above 200,000 through the end of next year. Home improvement spending slipped on a month-to-month basis in June, continuing its see-saw pattern of the last several months. Remodeling activity has remained in a relatively tight range for the past two years, but did provide some degree of stability during the housing market downturn while production of multifamily and single-family units fell rapidly.

Video: NAHB Economist Paul Emrath Discusses Remodeling Market Index

Remodeling Market Index Adjusts Downward in Second Quarter

NAHB’s Remodeling Market Index (RMI) slipped under pressure from a softening labor market, dropping two points to 45 in the second quarter of 2012. The downward adjustment comes after the RMI reached 48 twice in 2011, the highest reading since 2006.

The RMI is based on a quarterly survey of NAHB remodelers that asks them to rate current remodeling activity along with indicators of future activity, like calls for bids. An RMI below 50 indicates that more remodelers report market activity is lower (compared to the prior quarter) than report it is higher.

In the second quarter, the RMI component measuring current market conditions dropped to 46 from 49 in the previous quarter.

Current conditions for maintenance and repair and minor additions and alterations remained relatively strong in the second quarter.  The weakest part of the market continues to be major additions and alterations (jobs valued at $25,000 or more).  Larger projects are especially likely to be constrained by continuing tight credit conditions and inaccurate appraisals that make customer financing difficult.

Meanwhile, the RMI component measuring future indicators of remodeling business remained unchanged at 44, as declines in calls for bids (from 47 to 44) and appointments for proposals (from 45 to 42) were offset by increases in the backlog of jobs (from 43 to 46) and amount of work committed for the next three months (from 42 to 43).

For more detail on all RMI components and subcomponents, along with their history, see NAHB’s RMI web page: http://www.nahb.org/reference_list.aspx?sectionID=136

Private Residential Construction Reaches Three-Year High in May

The Census Bureau’s newest release on construction spending showed a 2.8 percent increase in spending activity for private residential projects in May 2012. On a three-month moving average basis, spending has increased during each of the last 8 months. This release also featured revisions to prior estimates dating back to January 2010. While the modest upswing in total private residential construction activity has been preserved, multifamily construction spending has been expanding at a slightly faster pace than before. Overall, this marks the highest nominal level of residential construction spending since early 2009.

New single-family construction activity expanded for the 12^th time in the last 13 months, gaining 1.8 percent versus April and nearly 15 percent from the May 2011 level of spending. Since bottoming out during the second quarter of 2009, spending on new single-family homes has risen more than 33 percent. Although the forecast calls for accelerating growth in homebuilding activity over the next several quarters, a sluggish labor market and tight lending standards are impediments to stronger gains in construction going forward.

As mentioned above, the revisions to historical data produced a modestly stronger recovery for new multifamily construction activity. Nominal spending increased 6.3 percent compared to April and has surged more than 50 percent on a year-over-year basis. Even with an unexpectedly weak reading in May, starts of buildings with 5+ units have averaged 211,000 on an annualized basis since the beginning of the year and permits have averaged 235,000 over the last 7 months. Therefore, new multifamily spending will likely recover further over the course of 2012. Home improvement spending improved for the second consecutive month, increasing 3.6 percent in May, coming on the heels of a 1.5 percent rate of growth in April. Although spending on remodeling held up better than new multifamily and single-family during the housing market downturn, remodeling activity has held within a generally close range since late 2010.

Private Residential Construction Spending Surges in April

Today’s construction spending release from the Census Bureau revealed a strong 2.8 percent jump in spending on private residential projects during April 2012. The initial estimates for February and March were revised from -2.2% and 0.7% to 0.1% and 0.4%, respectively. Overall, private residential construction spending has increased in each of the last 9 months. New single-family construction activity continued its positive momentum in April, rising 1.8 percent from the previous month and expanding on a month-to-month basis in all but one of the past 11 months. In fact, the dollar value of spending on new single-family homes is at its highest level in two years. Although certainly an improvement from the depressed levels of 2009, until 1) the labor market recovery gains any serious traction, 2) lending standards are less stringent and 3) the glut of distressed properties is worked off, gains in homebuilding activity will remain modest.

Multifamily registered the strongest gain of any category during April, notching a 4.1 percent increase over March and a robust 31 percent rate of growth on a year-over-year basis. Apartment demand has picked up over the past few years as the share of newly-formed households entering the rental market has risen appreciably. The rental vacancy rate slid to a nearly decade low and the absorption rate jumped to its highest level since 2005. Starts of 5+ unit structures have stayed above an annualized rate of 200,000 in each of the last three months while building permits have exceeded that level in each of the last six months. Finally, the home improvement component of construction spending proved volatile yet again, gaining 3.7 percent in April after posting a 2.9 percent estimated decline during the previous month. On a 3-month moving average basis, remodeling spending activity has held in a fairly tight range since late 2011, a result that is generally in line with NAHB’s most recent release of the Remodeling Market Index.

NAHB Blogs for National Remodeling Month

May is National Remodeling Month.  For that reason, more remodeling-related posts than usual appeared in Eye on Housing.  So, as the month draws to an end, here’s a list of all those posts for any who may have missed some of them:

Remodeling Market Index Little Changed in First Quarter  May 3

Bathrooms Top Kitchens as Most Popular Remodeling Project in 2011  May 8

GAO Report on the 25C Energy Tax Credit Misses the Big Picture  May 9

NAHB Remodelers Tackle Jobs of All Sizes, but Greatest Share of Revenue Comes from Large Projects  May 11

Local Economic Benefits of Remodeling  May 14

Traditional Reasons for Remodeling are Still the Main Market Drivers  May 21

Profile of the Typical Residential Remodeler May 24

In addition to the blog in May, NAHB’s main web site featured 2012 National Home Remodeling Month Promotional Materials

Finally, don’t forget that earlier this year remodeling estimates for all counties in the country were published and made available to members of NAHB Remodelers.

Eye on the Economy: Improvement for Housing

*Eye on the Economy is an NAHB newsletter that is published every two weeks and takes a larger view of recent economic and housing policy news.

After soft economic and housing reports for February and March, recent data suggest a return to the trend of housing market improvement – a fitting theme for May, National Home Remodeling month.

Leading the flow of positive news was the NAHB/Wells Fargo Housing Market Index (HMI), a measure of single-family home builder confidence. At a reading of 29, the HMI was up five points from the April level. This marks the highest reporting of the HMI in five years, even accounting for the period during which the federal home buyer tax credit was in effect. All components of the HMI were up in May, including the gauge of sales expectations over the next six months.

Further, the NAHB 55+ Housing Market Index rose significantly in the first quarter of 2012 compared to the survey of a year ago, suggesting better times ahead for builders of senior housing.

Consistent with these surveys, housing starts rebounded in April to a seasonally adjusted annual rate of 717,000. The April report marked the sixth consecutive month with starts near or above a level of 700,000 units. Gains were experienced in both single family and multifamily. The improvement in April suggests that declines in March were temporary and due to unusually warm weather in the early part of 2012.

Multifamily starts in buildings with five or more units increased by 4% to a rate of 217,000. In addition, multifamily starts data for February and March were both upwardly revised, suggesting that the rate of multifamily construction, which has been leading the industry in terms of growth, was stronger than initially estimated. Taking into account the revisions, the starts rate for 5+ multifamily units has been above 200,000 for the last three months.

The single-family housing market is again showing signs of improvement after a brief pause in the last month or so. Driving this expansion is the fact that housing affordability continues to improve.

The NAHB/Wells Fargo Housing Opportunity Index reached an all-time high for the first quarter of 2012. At a level of 77.7, the index indicates that more than three-quarters of all existing and new homes for sale are affordable for an average family’s income. However, it is worth noting that home buyer access to credit continues to hold back housing demand, despite historic affordability conditions.

Nonetheless, new home sales in April (343,000 at a seasonally adjusted annual rate) were up 3.3% over the March tally, and up nearly 10% from this time a year ago. Prices remained relatively flat, perhaps indicating emerging nationwide stability in pricing for new construction. Inventories of new homes ticked up for the first time in two years, but only marginally so. Inventory remains low – a 5.1 months’ supply. Finally, the March estimate of new homes sales was revised upward.

Similarly, the April existing homes report from the National Association of Realtors (NAR) presented more good news. Existing single-family sales were up 9.9% from a year ago and 3% from March. Existing condominium and co-op sales were up 6% from March and more than 10% from a year ago. Inventories were up in March, but this is consistent with seasonal patterns. The median sales price was up significantly in March, more than 10%, but this is indicative of a change in the sales mix rather than a large jump in national house prices. This good news for April is consistent with the previous reading of pending home sales from NAR.

Good news was also reported by the Mortgage Bankers Association mortgage survey, which showed the delinquency rate for mortgages fell to 7.4% during the first quarter of 2012. This marks the lowest reading in five years and is now roughly at normal levels. Short sales continue to grow, however. According to mortgage loan service provider Lender Processing Services, short sales surpassed foreclosure sales for the first time during the first quarter of 2012.

In other economic news, consumer and producer price indices remained relatively unchanged in April. The Consumer Price Index was unchanged, in part due to a 1.7% decline in energy prices, despite gasoline prices peaking at $4 a gallon in April. Declining natural gas prices were responsible for the overall drop. Moving in the opposite direction, residential rents were up more 2% in April, adding to the relative affordability of home purchases. Producer prices were slightly down in April, with a small decline in the much-watched price of gypsum, reducing its year-to-date increase for 2012 to 11.6%.

May is National Remodeling Month, and with this in mind, NAHB Economics continues to examine the issues involving the remodeling sector. While the economic benefits of home building are often cited in the media, remodeling has similar economic benefits. NAHB estimates that every $10 million of remodeling activity generates on average 78 local jobs, plus additional economic benefits in business income and state and local tax and fee revenue.

Remodelers who are NAHB members tend to work on larger projects, according to recent survey results. In fact, more than one-third of jobs undertaken by NAHB remodelers have a final price tag of $50,000 or more. The data also indicate that NAHB remodelers perform about 95% of projects totaling $100,000 or more but only about 20% of jobs costing $2,500 or less.

NAHB survey data indicate that the main drivers of remodeling remain constant. Survey data from the first quarter of 2012 find that the “need to repair/replace old components” and “desire for better/newer amenities” are still why most customers choose to remodel their homes, as compared to other options including energy efficiency and increasing the value of the home as an investment. The data reinforce the notion that owners are interested in enhancing the spaces in their homes more for themselves than future owners.

Finally, NAHB recently critiqued a report from the Government Accountability Office (GAO) that suggested possible changes to the widely used section 25C remodeling tax credit for energy-efficient upgrades to existing homes. The heart of the NAHB critique was that the GAO report missed the most salient point: the tax rule expired at the end of 2011 and should be extended to continue its policy benefits.

Profile of the Typical Residential Remodeler

Data from an annual census of its members allows NAHB to construct detailed profiles of particular types of members, such as residential remodelers.  The latest census shows that in 2011, NAHB’s typical residential remodeler member had about $536,234 in total revenue, employed 6 people (4 construction and 2 non-construction workers), and started 3 housing units.

The 2011 census further shows that the number of builder members whose primary business is residential remodeling rose to an estimated 11,986, up four percent from the 11,484 number estimated for 2010.  Of all NAHB’s builder members, 28 percent reported residential remodeling to be their primary business activity, while another 31 percent reported it to be a secondary activity.  This implies that in “all” 59 percent of builder members were engaged in residential remodeling one way or another, topping the list as the activity with the highest overall share of builder involvement in 2011.

 

	2008	2009	2010	2011
Number of Residential Remodelers	12,885	13,645	11,484	11,986

 

The census also collects demographic information about the remodeler.  For example, in 2011, 94 percent of residential remodelers were male, their median age was 54 years, and their average tenure at NAHB was 13 years.  In addition, 46 percent had a college or graduate degree, 35 percent had some college education, and 19 percent had a high school diploma or less.  About 12 percent reported building age-restricted housing for people 55 and older.

 

2011
Avg. # of Employees	6		Male	94%
Avg. # of Starts	3		Female	6%
Median Revenue	$536,234		College/Graduate Degree	46%
% Building for 55+	12%		Some College	35%
Median Age	54		Average NAHB Tenure (years)	13