BUSINESS

Construction spending increased 1.2 per cent in November, led by gains in housing

01/03/2012 10:39 EST | Updated 03/04/2012 05:12 EST
WASHINGTON - Construction spending jumped in November as builders spent more on single-family homes, apartments and remodeling projects.

The Commerce Department said Tuesday that spending on construction projects rose 1.2 per cent in November, following a revised 0.2 per cent drop in October. The increase was the third in four months and the largest since a 2.2 per cent rise in August.

The November increase pushed spending to a seasonally adjusted annual rate of $807.1 billion, still barely half the $1.5 trillion that economists consider healthy. Analysts say it could be four years before construction returns to health levels.

Home construction has begun a gradual rebound and likely added to the nation's economic growth in 2011. The chief reason is apartments are being built almost twice as fast as two years ago. Renting is the only option for many people who have lost their jobs, their homes or both.

For November, private residential construction increased 2 per cent in November to a seasonally adjusted $522.3 billion. It was the fifth consecutive gain.

Single-family construction rose 1.5 per cent while multi-family construction including apartments rose 1.3 per cent. The category that covers home remodeling rose 9.5 per cent.

Nonresidential construction was unchanged at an annual rate of $243.7 billion, Spending on hotels and hospitals rose but those gains were offset by weakness in other areas. Spending on office buildings dropped 1.3 per cent and the category that includes shopping centres fell 0.8 per cent.

Spending on government projects rose 1.7 per cent to an annual rate of $284.9 billion. That followed a 1.8 per cent drop in October. State and local construction gained 1.3 per cent and federal building activity increased 5.3 per cent. But even with those gains, activity in the government sector was down 5.3 per cent from a year ago.

The construction industry was hit hard by the housing bust and has had trouble recovering since the recession ended more than two years ago.

Severe budget problems have squeezed state and local governments while the federal government has come under pressure to get control of soaring budget deficits.

Private builders haven't fared much better. While their spending increased, they have scaled back on construction plans and are working from depressed levels.

Builders in November broke ground on homes at a seasonally adjusted annual rate of 685,000. That was a 9.3 per cent jump from October and the fastest pace since April 2010.

Builders should start at least 600,000 homes this year. That's up from 587,000 last year and 554,000 in 2009 — the worst year on record. Still, that's half the number that economists expect in a healthy market.

While construction may be turning around, home sales are still weak. This year will likely end up as the worst for new-home sales in history.

While new homes represent less than one-fifth 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 weak demand because of still-high unemployment and a glut of homes on the market because of foreclosures and short sales — where lenders accept less for a house than the mortgage on the home is worth. Those homes are selling for at an average discount of 20 per cent, which is lowering neighbouring home values.