Collins
by Mike Collins
May 24th, 2012

The Tide is Turning

There was a time when the evening news was filled with story after story of the decline of the housing market and commercial construction. If that weren’t enough, all of my business associates seemed to be on a constant vigil for dire predictions on construction spending to share with me, along with their condolences. That has definitely changed and now it is nearly impossible to ignore the steadily growing stream of positive economic and construction news.

The most recent example came with the announcement this week of increases in both new home sales and home prices. The Federal Housing Finance Agency’s monthly index of home prices showed that home prices increased 1.8 percent in March versus February 2012. Prices rose 2.7 percent from March 2011 to March 2012. There still exists a large phantom inventory of millions of homes owned by banks that are not yet officially listed for sale. This makes these above forecast increases in home prices even more impressive because the banks trickle these homes out onto the market at the first sign of strength in sales.

Also exceeding forecasts this week were the earnings per share (EPS) of Toll Brothers, a luxury home builder with an average home price of roughly $570,000. The company’s EPS more than doubled analysts’ expectations, with company management calling this spring selling season the “most robust and sustained” since the housing market correction began. Sales of new single-family homes were up across the board according to the U.S. Census Bureau, as the April sales figures showed an increase of 3.3 percent from March to April 2012 and a solid 9.9 percent increase versus sales the prior April. As a point of comparison with the segment of the market served by Toll Brothers, the median home sold in April was $235,700.

This week also saw positive indications for commercial construction with the introduction by McGraw-Hill of a potentially valuable new predictor of nonresidential spending. It is called the Dodge Momentum Index and is intended to provide a 12-month forward looking view of future nonresidential construction spending. When companies create indices, they spend countless hours examining the correlation between two or more statistics. McGraw-Hill has identified a 91 percent correlation between the construction planning reports compiled by Dodge and the Construction Put in Place figures published by the Commerce Department. This means the Dodge index is highly predictive of how nonresidential construction spending will turn out a year from now. The inaugural reading for April was 94.7, versus the 2000 base year value of 100. The index trend predicts improving strength in nonresidential construction in the coming months and in 2013. We’ll keep an eye on this data over time to confirm its predictive value for the industry.

Tags:


One comment
Leave a comment »

  1. Great info Mike! I am really interested in this Dodge Momentum Index. Why do they choose 2000 as the base year, and did they construct indices for each month in the the years between 2000 and 2012? How would the 94.7 compare to the DMI for April of 2011 for example?

Leave Comment

Current ye@r *