Friday, September 01, 2006

Construction Spending and Pending Sales

by Calculated Risk on 9/01/2006 10:45:00 AM

From AP: Construction Spending Plummets in July

Construction spending plunged by the largest amount in nearly five years, reflecting spreading weakness in the housing industry.

The Commerce Department reported Friday that construction activity dropped to a seasonally adjusted annual rate of $1.20 trillion in July, down 1.2 percent from the June level. It was the biggest one-month decline since a 1.3 percent fall in August 2001, when the country was mired in the last recession.
The July decline, which followed a 0.4 percent increase in June, was led by a 2 percent fall in private residential construction.

It was the fourth consecutive decline in residential construction and the biggest drop since January 2002, providing dramatic evidence that the nation's five-year housing boom has come to an end. The declines pushed private residential construction down to a seasonally adjusted annual rate of $627.4 billion.
This report was for July and the employment report was for August, but - if both reports are accurate - this implies residential construction workers are still employed, but working less, or at least getting paid less.

And from the National Association of Realtors: Pending Home Sales Index Points To Easing Market
The Pending Home Sales Index, based on contracts signed in July, is down 7.0 percent to a level of 105.6 from a downwardly revised reading of 113.5 in June, and is 16.0 percent lower than July 2005.
And now for some comic relief:
David Lereah, NAR’s chief economist, said there’s a closer relationship between annual changes in the index and actual market performance than there is with month-to-month comparisons. "In looking at year-to-year comparisons, the pending home sales index has been very close in predicting the actual pace of home sales," he said. "Based on recent changes from a year ago, the index shows existing-home sales should continue to ease after a stronger-than-expected decline in July, but are likely to flatten in the months ahead."

Lereah said psychological factors account for much of the decline in July home sales. "We’ve never seen a general decline in the housing market against a healthy economic backdrop where jobs are being created, the economy in growing and interest rates are favorable," he said. "Psychological factors are causing some buyers to remain on the sidelines, waiting for prices to stabilize or for more favorable news about the market and the economy. Contributing to this hesitancy is a lot of negative news stories, but in the end we believe that underlying market fundamentals will prevail."
That is nonsense. There is nothing in this index that indicates sales are "likely to flatten in the months ahead". But I agree with Lereah that fundamentals will prevail.