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Construction spending, pending home sales up

Hopes that the recession is easing got a boost Monday from reports that construction spending and pending home sales both fared better than expected in March.
/ Source: The Associated Press

Hopes that the recession is easing got a boost Monday from reports that construction spending and pending home sales both fared better than expected in March. The news pushed stock prices higher.

The Commerce Department said construction spending increased 0.3 percent in March, the best showing since a similar rise last September. Economists surveyed by Thomson Reuters had expected spending to drop 1.5 percent for a sixth straight monthly decline.

Meanwhile, the National Association of Realtors said its index of pending home sales rose 3.2 percent to 84.6 in March, the second monthly increase after it hit a record low in January. The pending sales index also is 1.1 percent above last year’s levels. Typically, there is a one- to two-month lag between a contract and a done deal, so the index is a barometer for future home sales.

Economists called the new data faint glimmers of hope that construction activity may be stabilizing, although at very low levels.

“Things certainly look a bit less bad than in the dark days at the turn of the year,” Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a research note.

The economic reports triggered a rally on Wall Street. The Dow Jones industrial average added about 190 points in afternoon trading and broader indices also rose.

However, economists cautioned that the construction rebound could be temporary, given all the problems facing the industry as a severe financial crisis has made it hard for builders to obtain financing.

Spending on private residential projects fell 4.2 percent in March, the latest in a series of declines that began three years ago when the housing bubble burst with disastrous effects for the home industry and the overall economy.

Nonresidential construction rose 2.7 percent in March, the biggest advance in nine months. It marked the second straight increase and was led by gains in office construction, hotels and power plants.

Government building activity also showed strength in March, rising 1.1 percent. A 1.3 percent gain in state and local activity offset a 1.7 percent drop in spending on federal projects. The rise in state and local activity could be early signs of the impact of the $787 billion economic stimulus bill that Congress passed in February in an effort to get money to the states for “shovel ready” building projects.

The various changes left total construction spending at a seasonally adjusted annual rate of $969.7 billion in March. Even with the unexpected increase, building activity is 11.1 percent below year-ago levels, reflecting the country’s steep recession.

With the financial sector embroiled in its worst crisis in seven decades, banks have tightened their loan standards, making it harder to get financing for shopping centers and other commercial projects.

The Federal Reserve will release results on Thursday of “stress tests” for the nation’s 19 largest banks, providing guidance on which banks may need more government support to withstand a more severe recession. The banks that need more capital will be given six months to raise it on their own and if they are unable to do so, the government will step in with support from the $700 billion financial rescue fund.

The initial stress test results showed that Wells Fargo & Co., Citigroup Inc. and Bank of America Corp. would need to raise more capital, sources have told The Associated Press, although the banks are disputing those findings. Investors also have grown concerned about regional banks that carry risky loans on their books in such areas as mortgages, credit cards and commercial real estate.

The government will brief banks Tuesday on its final decisions about their appeals, and the stress test results are expected Thursday afternoon. Regulators have said they will not allow any of the 19 firms to fail because it would be too dangerous for the rest of the financial system.

Many analysts are worried the commercial real estate market could topple into the worst crisis since the last great property bust of the early 1990s. Delinquency rates on loans for hotels, offices, retail and industrial buildings have risen sharply in recent months and are likely to soar through the end of 2010 as companies lay off workers, downsize or close.

Economists, however, are more hopeful that the three-year slide in housing could be nearing a bottom although they don’t see a significant rebound for some time.

New home sales have plunged 74 percent from their peak in July 2005. Sales of new homes hit a record low in January, posted an increase in February and then edged down 0.6 percent in March to a seasonally adjusted annual rate of 356,000 units.

Analysts said it appears the steep slide in new home sales is bottoming out. Prices, however are still falling. The median price of a new home sold in March dropped to $201,400, a 12 percent decline from a year earlier.

The demand for new homes appears to be recovering faster than that for previously occupied homes. In March, sales of existing homes fell 3 percent to an annual rate of 4.57 million from a downwardly revised pace of 4.71 homes in February, the National Association of Realtors reported.