Ahead of the Bell: Construction Spending

AP News
Posted: Aug 01, 2011 7:07 AM
Ahead of the Bell: Construction Spending

Construction spending likely showed a slight increase in June but the gain is not expected to be enough a May decline that pushed building activity near an 11-year low.

Construction activity likely edged up by 0.1 percent in June, according to economists surveyed by FactSet. The Commerce Department will release the new report at 10 a.m. Monday.

In May, construction spending dropped 0.6 percent to a seasonally adjusted annual rate of $757.9 billion. That pace was barely above the 11-year low hit in February. It is roughly half the $1.5 trillion in annual spending considered healthy by most economists.

Analysts believe it could be another four years before construction returns to healthy levels as the effects of a severe recession and collapse in home building linger.

Budget cuts at the state and local levels have led to a sharp drop in government spending. And in May, home builders cut spending with big cuts in apartment projects.

Homeowners are renovating their houses rather than moving. Builders are also struggling to compete with a wave of foreclosures that forced down prices of previously occupied homes.

Homes are now the most affordable they've been in years. But bargain prices and super-low mortgage rates have done little to boost sales. Economists say it could take several years before the housing market recovers.

Sales of new homes fell 1 percent in June to an annual rate of 312,000. That's less than half the 700,000 that economists say is typical in healthy markets. Last year was the worst for new-home sales on records dating back a half century and this year's sales are lagging behind last year.

Sales of previously owned homes fell for a third month in June and are also lagging behind last year's sales pace when 4.91 million homes were sold, the fewest since 1997. In a healthy economy, people buy roughly 6 million existing homes annually.

The fall in home prices has slowed but one reason prices have stabilized is that millions of foreclosures are in limbo, awaiting the results of a government investigation into improper practices by mortgage lenders. Once that probe is complete, banks will resume seizing homes and that is expected to push home prices down further.

Analysts said the weakening job market and the uncertainty over foreclosures could lead to deeper price declines in the second half of the year. They estimate that prices will fall another 5 to 10 percent by year's end.