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Construction Spending Falls 0.6 Percent in May

Wed July 06, 2011 - National Edition
DEREK KRAVITZ - AP Real Estate Writer

WASHINGTON (AP) Builders began work on fewer projects in May, led by steep declines in apartment construction and less spending by state and local governments.

Construction spending declined 0.6 percent in May to a seasonally adjusted annual rate of $757.9 billion, the Commerce Department said July 1. That put overall spending barely above an 11-year low hit in February. And it is roughly half the $1.5 trillion pace considered healthy by most economists.

Analysts say it could be another four years before construction returns to healthier levels. The weak construction spending data showed Americans are reluctant to both build and buy.

Home construction fell 2.1 percent. But much of the decline was because an equal decline in apartment building, which can be volatile from month to month. Construction of single-family homes dropped 0.3 percent.

Spending on government projects fell for the eighth consecutive month. The 0.8 percent in May dropped government construction spending to a seasonally adjusted $276 billion annual rate, the weakest pace since February 2007.

State and local governments accounted for all of the declines in government spending. They have been cutting back on building projects as they deal with large budget deficits.

In May, construction spending at the state and local level fell 1.2 percent to $246.6 billion — the lowest point since November 2006.

Spending at the federal level rose 2.1 percent to $29.6 billion.

“This still-rocky environment is still hurting consumer confidence,” said Jennifer H. Lee, senior economist at BMO Capital Markets.

Homeowners are renovating their houses rather than moving. Builders are struggling to compete with a wave of foreclosures that are forcing down prices of previously occupied homes. Older, re-sold homes are a comparative bargain and in great supply.

The median price for a previously occupied home in May was $166,500. New homes are about $56,100 higher, or nearly 31 percent. The gap is largely due to the flood of foreclosures and short sales, when lenders accept less than what’s owed on mortgages.

“Given the glut of homes on the market and in the foreclosure pipeline, homebuilders have little incentive to build,” said Sam Bullard, senior economist at Wells Fargo Securities.

The Obama administration’s signature foreclosure-prevention program is struggling to help many at-risk borrowers permanently lower their mortgage payments. More than half of the 1.6 million homeowners who have entered the program have fallen out entirely. That compares with roughly 731,000 homeowners who have had their mortgages permanently lowered as of May.

Of those who have received modifications, roughly 21,300 homeowners, or 3 percent, have had the principal amounts on their mortgages reduced, according to the U.S. Treasury Department. The median principal amount reduced is $69,532, or about 32 percent of the loan.

Lenders are not required to reduce principal amounts.

Building on private projects fell 0.4 percent to a seasonally adjusted annual rate of $477 billion in May.

Non-residential construction, which includes factories, offices, amusement and recreation, lodging and transportation, ticked up 0.1 percent in May. That increase would have been larger but was pulled down by weak commercial construction spending.

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