In another sign of the housing market’s continued strength, U.S. spending on residential buildings—both private and public—increased by 0.4% in August to $795.5 billion, while nonresidential spending declined by 0.4% to $788.6 billion, on a seasonally adjusted annual rate.
The housing market remains robust as money is steered from investments in infrastructure that are sorely needed.
The data points directly to a housing market that remains robust as home prices fluctuate around record highs and as money is steered from investments in infrastructure that are sorely needed.
The report, released by the government on Friday, showed that June was the first time since November 2006 that Americans spent more on building homes than on building anything else—including offices, schools, hospitals and other nonresidential buildings.
It was somewhat anticlimactic that August’s report represented such a turning point; June’s and July’s readings on residential spending were revised significantly higher. Still, the gap between residential and nonresidential spending continued to widen in July and August.
It is tempting to compare this data to 2006, when housing prices peaked and started to plummet, dragging down the soaring housing market that was destined to crash and, eventually, push the economy into a deep recession.
This time, however, the market is not in a bubble. In fact, the key difference in today’s housing market is the resilient demand for private houses, ignited by the pandemic and fueled by historically low mortgage rates and historically high personal savings rates.
After the financial crisis and before the pandemic, spending on residential buildings began to move in tandem with nonresidential spending, even though a consistent gap between the two remained.
Since the pandemic began, residential construction spending has increased by 32.4%, while its nonresidential counterpart has dropped by 11%.
This trend, though, made a U-turn in the wake of the two-month mini-recession in 2020. Since the pandemic, residential construction spending has increased by 32.4%, while its nonresidential counterpart has dropped by 11%.
The ability to work remotely is the main contributor to this reversal as some homeowners and renters want bigger houses to accommodate their home offices. Other workers are now able to move to less populated cities, where housing prices and costs of living are lower.
Dire need for infrastructure modernization
Data on non-residential construction spending continues to support our case for a significant revamp of the country’s infrastructure system that has been in dire need of modernization.
The details on public spending on nonresidential construction—which includes highways, health care buildings, schools, transportation systems and power grids—reveal a stark picture of the U.S. infrastructural development as the spending-to-GDP percentage ratio has essentially stagnated since its peak of 2.09% in 2009.
Spending on construction is a leading indicator for infrastructure and home building needs in the near future because it takes some time for those newly constructed buildings to come online and be put into use.
As of right now, the market is heading to a future with more money allocated toward home building than needed infrastructure.
That spending pattern only bolsters the case for the $1 trillion infrastructure bill that remains before Congress.
The takeaway
Higher residential construction spending is another sign that work-from-home is here to stay, not only in terms of how employees perceive it, but also in terms of all those fixed costs spent on home building and other home goods. In the end, that spending will become a significant drag on bringing workers back to the offices.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
