Ahead of the Bell: Construction spending

AP News
Posted: Nov 01, 2011 6:51 AM
Ahead of the Bell: Construction spending

U.S. builders likely increased spending on homes, office buildings and other projects in September for the second straight month.

Economists expect construction spending rose 0.3 percent, according to a survey by FactSet. September's report will be released at 10 a.m. Eastern time on Tuesday.

In August, construction spending rose 1.4 percent. The increase was spurred by a jump in spending on government projects, such as roads and schools.

Building activity reached a seasonally adjusted annual rate of $799.1 billion. That's 4.8 percent above an 11-year low hit in March. But it's barely more than half the $1.5 trillion pace considered healthy.

Analysts say it could be four years before construction returns to healthy levels. A dismal outlook for housing and a weak economy have forced governments to cut spending and builders to scale back construction plans.

Housing construction, in particular, has all but stalled. Americans bought fewer homes during this year's peak buying season than at any time in the past half-century. Unemployment is stuck above 9 percent, and many people are fearful about buying a home out of concern they could lose their jobs or home prices could fall further.

State and local governments have been forced to cut back because of severe budget problems, while the federal government has come under pressure to get control of soaring budget deficits.

In September, sales of new homes rose after four straight monthly declines, largely because builders had cut prices in the face of depressed demand. This year is shaping up to be the worst for new-home sales on records dating to 1963.

While new homes represent less than one-fifth of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

Builders are struggling to compete with foreclosures and short sales _ when lenders accept less for a house than a mortgage is worth. Those homes are selling at an average discount of 20 percent, and they are lowering neighboring home values.

Home builders started projects in September at the fastest pace in 17 months, a hopeful sign for the economy. But most of the gain was driven by a surge in volatile apartment construction, a sign that many are choosing to rent rather than own a home.

The weak sales and construction figures underscores how badly the housing market is faring and suggests a sustained recovery is years away. It will also impact home prices, continuing to drive them lower.

Economists at Moody's Analytics say prices might stop falling by early next year, but they don't expect a healthy recovery until 2015 at the earliest.