07/01/2013 10:05 EDT | Updated 08/31/2013 05:12 EDT

US construction spending up 0.5 per cent in May as home building at highest level since 2008

WASHINGTON - Spending on residential housing rose in May to the highest level in 4 1/2 years, helping to send overall construction spending higher despite a big drop in nonresidential activity.

Construction spending rose 0.5 per cent in May compared with April when spending was up 0.1 per cent, the Commerce Department said Monday.

Private residential construction rose 1.2 per cent to the highest level since October 2008, further evidence of a rebound in housing. Spending on nonresidential projects fell 1.4 per cent, dragged lower by declines in office building and the category that includes shopping centres.

Public construction rose 1.8 per cent with state and local activity up 1.6 per cent and federal spending rising 0.6 per cent.

Total construction rose to a seasonally adjusted annual rate of $874.9 billion in May, 5.4 per cent higher than a year ago.

The rise in residential construction reflected a 0.4 per cent increase in new single-family construction and a 2.5 per cent jump in multi-family construction.

Residential construction spending is 23.1 per cent higher than a year ago while nonresidential construction is 0.9 per cent below the level of a year ago. Public construction is 4.7 per cent lower than a year ago with government activity depressed by tight budgets.

For all of 2012, construction spending increased 9.8 per cent. That marked the first annual gain after five straight years of declines. Construction spending is still well below healthy levels although housing is helping to support building activity in the face of the weakness in government projects.

Steady hiring and nearly record-low mortgage rates have encouraged more Americans to buy homes. More people are also moving out on their own after living with friends and relatives in the recession. That's driving a big gain in apartment construction and also pushing up rents.

New-home sales rose 2.3 per cent in May to a seasonally adjusted annual rate of 476,000, the highest level in five years, but still below the 700,000 annual rate that is considered healthy by most economists.

Sales of previously occupied homes surpassed the 5 million mark in May, the first time that has happened in 3 1/2 years.

Steady hiring and low mortgage rates have helped to boost home sales.

However, mortgage rates have been rising in recent weeks as the Federal Reserve has sent signals that it may start trimming back its level of bond purchases that have sought to keep long-term rates such as mortgages low as a way to boost the economy.

The average rate on 30-year fixed loans rose to 4.46 per cent last week, according to a survey by Freddie Mac. That's the highest average in two years and a full point more than a month ago. The rate rose from 3.93 per cent, marking the biggest one-week jump in 26 years.

While higher rates could dampen home building, builders say they don't believe rates at current levels will depress sales significantly. Some builders believe sales could be spurred in the near term as potential buyers rush to lock in mortgages before rates rise further.