• At $752 billion, it’s 28% above a year ago.

  • Total figure has tripled since 2010.

  • Monthly growth in 2021 has slowed after a torrid pace in the second half 2020.

By Manuel Gutierrez, Consulting Economist to NKBA

Spending for residential construction projects, combining new builds and remodeling, reached a new annualized high of $752 billion in May. Although it is a gain of just 0.2% over the previous month, it is still a remarkable 28% above last year. Unlike virtually all other economic sectors, residential construction did not experience a major collapse during the pandemic shutdown.

Spending for residential projects fell by just 1.4% during that period, while retail sales, for instance, fell by more than five times that percentage: down 7.9%.

The shaded gray bar in the left panel of Figure 1 shows the very modest drop in construction spending between March and July 2020. That blip was quickly followed by a strong resurgence throughout the remainder of last year, leading to May’s historically high peak.

Additionally, the gains in residential construction spending are based on solid sector growth, unlike increases in consumer spending for gasoline, for example, which are the result of price increases and not of greater purchases at the pump.

Annualized residential spending today is three times as high as the $253 billion registered in May 2010. That equates to an average yearly increase of 18%, about eight times the average consumer price inflation of 2.1% over that same time frame.

Private construction is becoming increasingly concentrated in the residential sector. Its share of total private construction rose to 63% in May — also an all-time high.

Note in the right panel of Figure 1 that although the residential share increased from 49% in 2010 to approximately 55% by 2018 — an increase of six percentage points in 8 years — the pace has greatly accelerated during the past 18 months, jumping by seven additional points.

The strong push by consumers to purchase and remodel homes during the pandemic-related shutdown is responsible for this burst of construction activity.

That pace of residential spending, however, is expected to slow in the near future. This has already been evident since the beginning of this year. Total home building was rising at a monthly pace of 3% in the second half of last year, but so far this year, it has slowed to 1.3% per month.

The overall 0.2% May increase in residential construction was driven by a modest 0.8% gain in single-family homes (rounded to 1% in the top right panel of Figure 2), while spending for multifamily buildings was flat in May. Homeowner remodeling, the third component of the residential sector, fell by 0.6% in May.

The top right panel of Figure 2 shows the rapid pace of increases for single-family construction in the last six months of 2020. Average monthly increases over that period were just under 6%. Again, that pace slowed dramatically since the beginning of this year.

Homeowner remodeling spending follows a more erratic path, as can be seen in the bottom right chart. Although spending fell a relatively modest 0.6% in May, it has fallen in five of the last nine months. Nevertheless, as seen in the bottom left panel of Figure 2, spending by homeowners for remodeling is currently near the all-time high of $252 billion achieved this past March.

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