Record-low Mortgage Rates Fuel New Construction

Construction spending came in at a seasonally adjusted annual rate of $1.46 trillion in November, almost 1% above October’s upwardly revised pace. Residential construction led the growth as nonresidential spending contracted. Commercial construction has been weak as the pandemic has ravaged the tourism and hospitality industries. A slow rollout of the vaccine could delay herd immunity and the broader reopening of the economy.

Private new residential construction grew 4% in November though home improvements were muted for the second month in a row. Costs for building materials, especially lumber and plywood, have jumped since the pandemic began. Some of those costs are being passed on to buyers. Home prices posted double-digit increases during 2020 in popular second-tier cities and suburbs.

The housing boomlet is expected to continue in 2021 with interest rates expected to remain low. Forbearance programs allowed by the CARES Act will lapse in a few months, which could put struggling homeowners in precarious positions. The recent surge in home prices suggests that homeowners’ equity is still strong so those who cannot afford to pay their mortgages after aid lapses may be able to avoid foreclosure by selling their homes. That is cold comfort as the gap between haves and have-nots widens.

Private nonresidential construction contracted for the fifth consecutive month; the biggest drop came from lodging, where construction spending is almost 27% below year-ago levels. Hotels lost out when international tourism ground to a halt due to COVID. Some investors are getting creative and snapping up struggling hotel properties to convert into affordable apartments. Construction spending on offices, educational facilities, religious buildings, transportation infrastructure and manufacturing rose in November compared to the previous month, but all components of nonresidential spending were lower year-on-year.

State and local spending edged higher in November as government officials rushed to spend aid from the CARES Act before it expired at the end of the year. Spending on hospitals, primary and secondary schools, highways and streets and offices all increased during the month. The latest round of federal support passed before the new year provides indirect support for state and local governments in the form of funding for rental assistance, vaccinations, testing, hospitals and schools but large gaps remain in state and local budgets that would benefit from additional support by the next administration; I hope we have learned a lesson from 2008-09 when states and localities lagged the overall economic recovery.

Bottom Line
Construction spending has returned to pre-crisis levels, purely driven by the boom in the residential sector. Nonresidential construction spending is sparse with muted business investment and depleted state and local coffers. The latest $900 billion aid package will not be enough to plug the holes created by the pandemic, as my colleague Diane Swonk who advised the Congressional Budget Office for two terms has emphasized.

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