June Spending on Construction Declines by 1.1% : Analysts Cite Adverse Effect of New Tax Laws and Current Oversupply

Construction spending, depressed by continued weakness in apartment and office building, fell 1.1% in June, the second consecutive monthly decline and the largest setback since March, the government reported Monday.

The Commerce Department said construction spending totaled a seasonally adjusted $390.1 billion in June, following a revised 0.7% decline in May. The May decline had originally been reported as a 0.3% increase.

The June decrease was led by large declines in multifamily construction and non-residential building, including decreases in spending for office buildings, hotels, shopping centers and factories.

Analysts predicted much of this weakness would persist for some time, given a current oversupply of apartments and office buildings and the adverse effect of the new tax law on construction projects.

The overall decline of 1.1% was the largest drop since a 3.3% plunge in March.

Robert Ortner, undersecretary of commerce for economic affairs, noted that apartment construction is now 23% below where it was a year ago and he predicted that this weakness will continue.

Spurred Overbuilding

Analysts said the old tax law had spurred widespread overbuilding because investors were seeking tax shelters and were not as concerned about whether the space could be rented. Now that those tax benefits have been eliminated, the country is left with a lot of unused space.

Residential construction rose 1.2% to a seasonally adjusted annual rate of $195.5 billion in June, due mostly to additions and renovations. The category that includes new housing fell 0.3% to an annual rate of $138.9 billion as a 0.7% increase in single-family construction was offset by a 5.2% drop in multi-family units.

Meanwhile, the National Assn. of Realtors said higher home prices and mortgage interest rates prompted a decline in its “affordability index” for June. The association, which arrives at the index by comparing median income with median home prices and interest rates, said the index was 107 in June, compared to 110.3 in May.

This meant that, in June, a family earning the national median income of $29,850 would have 107% of the income needed to qualify for a conventional loan covering 80% of an $87,000 home, the national median price.

The Commerce Department’s report said construction of non-residential buildings fell 4.7% to a seasonally adjusted annual rate of $84.3 billion. The decline was widespread among the major categories, with industrial, office, hotel and shopping center construction all posting declines. Office building fell 2% in June compared to May and is 12% below last year’s level.