What’s Going on With Weak Residential Construction Spending?

Private residential construction spending has been fairly weak of late—0.3% rise in July’s spending mostly came from increased allocations on home improvements—even as new home sales and single-family homebuilding have been increasing. The situation is made more confusing because residential construction employment also has been on the rise, notedMark Vitner, senior economist with Wells Fargo.

Still, investment in residential construction declined at a 7.7% annual rate during the second quarter and economists’, including those at the Federal Reserve Bank of Atlanta’s GDPNow, expect drops during this quarter by about a 4.8% annualized rate. A closer look at the data reveal that while new single-family homes sales increased 12.4% in July, most of that was attributed to sales of more moderately priced homes between $200,000 and $400,000 in the South, where prices are lower, Vitner said. Sales of starter homes and higher priced dwellings remained mostly flat.

“The shifting mix of home sales may partly explain the recent slide in private residential construction spending,” he said. “New home sales have fallen in many high-priced markets, reflecting less foreign buying and reduced affordability in general. Higher land costs are apparently pushing development back out to the suburbs, where land and building costs tend to be lower.”

New home sales and housing starts climbed in July as builders have seen more interest from buyers and for large tract development, Vitner and other Wells Fargo economists said. Meanwhile, existing home sales have been mixed, as tight inventories—existing home inventories dropped 5.8% in July from a year ago—and keep new buyers looking and sellers worried about finding a new home on the sidelines.

The number of single-family homes under construction jumped 11.6% from a year ago, even as residential construction spending for single-family homes fell for the past four months, Vitner said. This puzzling situation likely represents a shift away from the expensive apartment construction and urban infill that took place following the recovery.

“As rents and home prices have soared in submarkets close to urban centers, single-family development has increasingly been pushed back out into the suburbs,” he said. “Apartment development, while still in full swing in much of the country, also appears to be moving toward lower costs areas. Moreover, builders are increasingly seeking out opportunities to develop townhomes, which meet the needs of those still interested in having an urban lifestyle but at a lower price point than traditional single-family homes.”

- Nicholas Stern, editorial associate

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