Homebuilder sentiment was recently reported to be weakening, but U.S. spending on construction isn’t being held back by this news. During the month of August, construction spending almost hit a 4-1/2 year high due to increases from both the private and public arenas, according to the Commerce Department. The increase was .6 percent when compared to the month of July. July’s figures were revised to a number more than double the original estimate. These positive numbers show that there’s hope for growth in the third quarter this year.
Some may think this data seems a little dated, as we are nearing the end of October. The government shutdown delayed the original release of this data, scheduled for October 1st. The private sector of construction spending increased by 1.2 percent to a five-year high leading the market to believe higher interest rates have not lowered builder confidence, nor has it slowed activity as previously assumed.
With lots of money being spent on building new homes (increasing supply) theory would imply prices would start to cool, but this has not been the case. Home prices have jumped more than 12 percent from a year ago making the affordability of buying a home more difficult. Household income growth, up only 3 percent year-over-year, has not kept up with the rise in home prices. Lawrence Yun, chief economist for the National Association of REALTORS® wrote in the September Sales report, “Affordability has fallen to a five-year low, as home price increases easily outpaced income growth. Expected rising mortgage interest rates will further lower affordability in upcoming months.”
For home buyers this could be a challenging environment. First time buyers tend to purchase lower-priced homes. If income growth is not keeping pace with home prices, they could get priced out of the market and be forced to put off their home purchase for the time being. The glimmer of hope in this situation is that fixed mortgage rates have dropped to a four month low (30-year fixed rate is 4.13 percent this week). This helps take a little pressure off the increasing home prices in regards to home affordability. In the long term if incomes don’t keep pace with home prices, construction spending may start to decline due to a lack of demand.
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