Monday, November 3, 2008

Construction spending may be bottoming

These charts suggest we're seeing the final chapters of the great housing bust. The housing market peaked about 3 years ago, and residential construction started declining a few months after that. Residential construction has now fallen to 3.3% of GDP, which is about as insignificant as it has ever been, and it has subtracted 3 percentage points from GDP in the process of shrinking. The additional fact that residential construction has been unchanged for the past three months (through September) suggests that housing inventories may have been pared enough to allow the construction cycle to finally turn back up.

The good news on residential construction is tempered, however, by signs that nonresidential construction is slowing down. The nonresidential construction sector is likely to be more resilient than the residential market, however, if only because it wasn't the "beneficiary" of affordable lending practices and the intense demand for subprime loans fed by Freddie and Fannie's insatiable appetites. With hardly any government intervention to mess things up, the commercial mortgage-backed market has traditionally been more stable than the residential market, thanks, for example, to the absence of zero-down loans and the presence of prepayment penalties. So even if nonresidential construction turns down, it's unlikely to be as big a drag on the economy as the downturn in residential construction was.

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