Latest construction, housing data are two positives for the economy

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Call it a good start for the week and month, as two indicators came in with better-than-expected readings Monday.

First, construction spending rose 0.3 percent March, the U.S. Commerce Department announced Monday, well above the 1.0 percent decline seen by economists surveyed by Bloomberg News (pdf). Also, pending homes sales rose 3.2 percent in March, the National Association of Realtors said; analysts had expected the index to remain flat in March.

The NAR's Pending Home Sales Index, a forward looking indicator, increased to 84.6 in March from 82.0 in February. The index is based on sales contracts signed for existing homes, in this case contracts signed in March. Most home sales close within six weeks of a signing, and at that point the federal government counts them as existing home sales.

In general, economists view existing home sales as a more accurate indicator of housing sector activity than pending home sales, due to the number of pending home sales that fall through, mortgage problems, title issues, liens, home defects, and other complications that sometimes prevent signed housing contracts from being finalized.

Positive housing momentum?

Even so, Lawrence Yun, chief economist for the NAR, said he senses some positive momentum in the housing sector as a result of March's pending home sale rise.

"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit, which increases buying power even more in areas where special programs allow buyers to use it as a down-payment," Yun said.

Joseph Brusuelas, a director at Moody's Economy.com in Pennsylvania agreed. "Individuals are seeing areas they were previously priced out of suddenly available and they're testing the waters," Brusuelas told Bloomberg News Monday. "It's part of the gradual improvement in economic conditions that we're beginning to observe around the country."

Meanwhile, construction spending also represented another data point that was easy on economists' eyes. Construction spending unexpectedly rose 0.3 percent in March, boosted by spending on non-residential building and public works projects, the Commerce Department said. On a year-over-year basis, overall construction spending has declined 11.1 percent.

What's more, construction spending figures for February and January were revised higher, which should result in the U.S. government revising figures for quarterly GDP, scheduled to be released next week.

In March, state and local government spending, perhaps boosted by the federal government's fiscal stimulus package, increased 1.1 percent. Residential construction rose 1.3 percent, nonresidential construction rose 2.7 percent.

Economic Analysis: Two pleasant data points for investors and economists. Of the two, investors should allocate more weight to construction spending: construction spending may not be a major growth catalyst for the U.S. economy, moving forward, but if it stays out of negative territory, that eliminates a major economic drag, and economists will take it. Second, the pending home sales data, while also positive, is not as telling as the finalized new home sales and existing home sales metrics -- which measure housing transactions that have closed, or been finalized. That said, the rise in March pending homes sales does provide evidence of increasing home buyer interest, a welcome sight in the U.S. housing sector.

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