Monday, May 3, 2010

Construction still weak, but the outlook is improving

Total construction spending has been declining for the past four years, but the good news is that it is increasingly apparent that residential construction spending hit bottom a year ago and has likely stabilized. This is one more sign that the housing market has seen the worst, and that things are likely to be gradually improving over the next year or so. Residential construction spending last year had fallen to its lowest level ever relative to GDP, a level that ensured that new home construction would be much lower than the ongoing rate of housing formation, and thus the excess inventory of homes would be gradually but surely eliminated. We are probably very close to that point now. Looking ahead 2-3 years, we could see some dramatic increases in residential construrtion spending as the supply of homes starts to become scarce relative to stronger demand.

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