December 02, 2009
December 2, 2009 (Housing Market Monitor)
By Dean Baker
Manufacturing facilities rose from 10.0 percent of non-residential construction in October of 2007 to 35.4 percent in May of 2009.
Pending home sales rose 3.7 percent in October, after rising 6.0 percent and 6.4 percent in September and August, respectively. New home sales increased by 6.2 percent in October, more than reversing a 2.4 percent drop in September. October pending homes sales were 31.8 percent above year ago levels, reaching a rate that is near bubble peaks.
The strong sales in October were almost certainly the result of buyers rushing to complete a purchase in time to qualify for the first-time buyers tax credit. Contracts signed at the beginning of the month would almost certainly be concluded by the November 30th expiration date for the original credit. This would be far less certain for contracts signed near the end of October.
It is worth noting that the regional patterns in the two series are quite different, suggesting that factors on the supply side may be more important than the demand side. The biggest gains in the National Association of Realtors’ Pending Homes Sales Index were in the Northeast and Midwest; rising by 19.9 percent and 11.6 percent, respectively. Year-over-year sales for these regions in October were up by 44.2 percent and 36.6 percent, respectively. By contrast, new home sales for the Northeast and Midwest were down by 5.1 percent and 20.0 percent. Year-over-year sales were up by 5.7 percent in the Northeast and down 11.1 percent in the Midwest.
New home sales were far stronger in the West and especially the South. While new home sales fell 5.1 percent in the West in October, they were still 8.1 percent above year ago levels. Sales in the South were up 23.2 percent for the month and stand 8.4 percent above their year ago level. By contrast, pending home sales rose just 5.4 percent in the South and fell 11.2 percent in the West. Sales in the South are up 31.6 percent from year ago levels, while sales in the West are up by just 21.9 percent.
The sharp rises in new home sales in the South and West are likely attributable to builders in former bubble markets in Florida, California, and Nevada dumping their inventories. There were not comparable bubbles and building booms in the Northeast and Midwest, and therefore not the same huge inventory of new homes. Builders may have made a special effort before the initial tax credit expired.
It is worth noting that there was a sharp drop of 8.2 percent in the average new house price in October (the median price rose slightly), however this could have been driven primarily by the changing regional mix. The South is the lowest priced region, so a sharp jump in sales in the South would lead to a fall in average prices, other things equal.
The construction data released on Monday showed that the slide in non-residential construction appears to be accelerating, with private construction falling 2.5 percent in October. The year-over-year level is now down by 20.6 percent. The sharpest falloffs have been in hotels, retail, and office space where year-over-year levels are down by 44.8, 40.0, and 36.9 percent, respectively. Given the enormous overbuilding in these sectors, spending is likely to continue to fall through most of 2010 as remaining projects get finished but very few new ones are started.
A relatively new development is the drop in the construction of manufacturing facilities. Manufacturing construction fell 2.3 percent in October and is now down by 21.9 percent from a peak in May. There had been sharp growth in this sector, driven by the building of ethanol facilities. At the May peak, manufacturing accounted for 35.4 percent of private non-residential construction. By comparison, it had been less than 10.0 percent of construction in October of 2007. With most of the ethanol-related projects nearing completion, manufacturing construction is likely to fall back toward that level over the next year.
In 2010, it is likely that residential construction will remain near its current low level, which means that with non-residential construction falling sharply, the sector will continue to be a drag on the economy.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR’s Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.
