A Bright Spot: Residential Construction Rises as GDP Falls

Gross Domestic Product, or GDP, is the value of all goods and services produced in an economy within a specific time period, typically a quarter. Because the total value of GDP is so large, and difficult to fathom, it is measured by how much output rose or fell in a quarter — that is, “GDP growth.”

In the latest quarter ended in March, not surprisingly, GDP didn’t grow at all, but in fact dropped by a sizable 4.8%. Declines of this magnitude are typically seen only during economic recessions or times of severe economic distress, such as under the present pandemic.

This decline was expected, since Federal and State governments mandated the closure of  businesses they deemed non-essential. This was on top of businesses in industries that had already collapsed in late February and early March because of health issues associated with COVID-19, including airlines, hotels and tourism-related activities, and many mass entertainment venues like movie theaters.

Combined, hotels and entertainment industries employed nearly 17 million workers in February; by the first two weeks of March, they had lost 460,000 jobs. Jobs data for April will be released on Friday, when there will be a better quantitative sense of the devastation caused by the forced shutdown of businesses.

Most GDP components, shown in the chart above, declined. Most importantly, Consumption fell 7.6% in the quarter; this represents about two-thirds of GDP. A critical component for an economy’s future growth is business investment (“Invest” in the chart), which fell by 8.6% in the first quarter. Further, this is the fourth consecutive month when business investment has fallen.

Residential investment is the only major area displaying a positive gain; this is mostly the result of very strong new housing construction, i.e. housing starts, in the first two months of the year. Total housing starts for the first quarter of this year were 325,000, or 22% higher than the same period of 2019. But, as reported, housing starts collapsed in March by a 22% from February.

Spending for Construction Projects

It should be noted that the Construction Investment growth rates shown in the chart above, both Residential and Non-Residential, are a different measurement than the construction “spending” data normally reported here. This spending data, discussed below, reflect the value of all construction projects, including those for simple maintenance and repair that are not considered investment for GDP counting purposes.

Nonetheless, the Construction Spending data reveal a similar pattern, although their magnitude is different. Residential construction in March is up by 2.3% while non-residential is down by 1.3%. The residential sector was boosted by a robust increase of more than 10% in Homeowner Remodeling, which partially compensates the sharp decline in the previous month, as illustrated  in the bottom right graph below.

Also, spending for construction of multifamily housing units rose in March by a modest 2%, to an annualized rate of $60 billion.

Mortgage Rates Continue Trending Down

Reflecting partly the weakness in the housing markets, mortgage rates fell last week. The 30-year, fixed mortgage rate dropped by 10 basis points to 3.23%; rates for other terms, such as the 15-year fixed rate, also fell.

Even though in the first half of April mortgage applications increased, the latest data from the Mortgage Bankers Association indicates that applications fell in the last week of April.

Applications for new home mortgages as well as for refinancing existing mortgages also fell. The Association’s purchase index fell by 12% on the week, while its refinance index was down 7%.

Manuel Gutierrez, Consulting Economist to NKBA

Explanation of NKBA’s Economic Indicators Dashboard

The dashboard displays the latest value of each economic indicator with a colored triangle that highlights visually the recent trend for each of the drivers. “Green” is a positive signal, indicating that the latest value is improving; “Yellow,” as it’s commonly understood, denotes caution because the variable may be changing direction; “Red” indicates that the variable in question is declining, both in its current value and in relation to the recent past.

Note that all the data, except for “mortgage rate” and “appliance-store sales” are seasonally adjusted and are represented at annual rates.

Remodeling Expenditures. This is the amount of money spent on home improvement projects during the month in question. It covers all work done for privately owned homes (excludes rentals, etc.). The data are in billions of dollars and are issued monthly by the U.S. Department of Commerce.

Single-Family Starts.  This is the number of single-family houses for which construction was started in the given month. The data are in thousands of houses and are issued monthly by the U.S. Department of Commerce.

Existing-Home Sales. These data are issued monthly by the National Association of Realtors and capture the number of existing homes that were sold in the previous month.

High-End Home Sales. This series are sales of new homes priced at $500,000 and higher. The data are released quarterly by the U.S. Department of Commerce and are not seasonally adjusted. Thus, a valid comparison is made to the same quarter of prior year.

Mortgage Rate. We have chosen the rate on 30-year conventional loans that is issued by the Federal Home Loan Mortgage Corporation (known popularly as Freddie Mac.) Although there are a large number of mortgage instruments available to consumers, this one is still the most commonly used.

Employees in Residential Remodeling. This indicator denotes the number of individuals employed in construction firms that do mostly residential remodeling work.

Building-Materials Sales. These data, released monthly by the Department of Commerce, capture total sales of building materials, regardless of whether consumers or contractors purchased them. However, we should caution that the data also includes sales to projects other than residential houses.

Appliance-Store Sales. This driver captures the monthly sales of stores that sell mostly household appliances; the data are stated at an annual rate. We should not confuse this driver with total appliance sales, since they are sold by other types of stores such as home centers.

We hope you find this dashboard useful as a general guide to the state of our industry. Please contact us at Feedback@nkba.org if you would like to see further detail.