Zillow Market Pulse: June 1, 2020

June 1, 2020

Homebuilding projects helped buoy construction spending. Most homebuilders are using incentives in order to encourage sales. And manufacturing activity remains depressed, but improved slightly in May.

• Construction spending beats expectations, led by homebuilding

  • Overall construction spending fell 2.9% in April from March, the largest decline in 18 months, but not as bad as expected.
  • Private residential construction was down 4.5% on the month, but remains up 6.2% year-over-year.

• A majority of homebuilders used incentives to boost May sales

  • 52% of builders used incentives like free updates or discounted home prices in order to encourage sales activity in May.
  • This level is well-below where it was during the early stages of the Great Recession.

• Key measures of manufacturing activity rebound slightly

  • The ISM Manufacturing Index increased 1.6 points in May from April, to 43.1 (readings below 50 indicate industry contraction).
  • The IHS Markit Manufacturing sat at 39.8 in May, up 3.7 points from an all-time low in April.

 So what?

Even as construction spending fell by more in April than it has in any month in more than a year-and-a-half, in many ways, today's release on construction spending felt like a win. The 2.9% monthly decline beat expectations for a worse tumble, and the annual decline of 3% appears far more benign when compared to some of the other blockbuster economic data that's been released over the past few months. The beat was surely driven by the fact that construction has remained an essential service in many areas, which has kept activity relatively high throughout the sector. But the subcomponent that has fared particularly well is residential construction, which, much like the headline figure, took a step back this month but has remained in a much more formidable position that some would have predicted at the onset of this crisis. Private single-family home construction remains up 4.5% since last year and up 10.8% year-to-date. Multifamily construction has been far less active, and is down 7.4% year-to-date.

The decent pace of home construction is likely to be buoyed by April's surprisingly strong new home sales figures, which should reassure builders that there is demand for the homes they're putting up, even amid so much economic uncertainty and strife. Perhaps because of this, builders are holding off on offering incentives to would-be buyers in order to close to the deal. In May, 52% of builders offered incentives like free upgrades, covered closing fees or home discounts in order to finalize the sale, according to the National Association of Home Builders — well below levels during the Great Recession (as high as 73% in May 2007). This offers an interesting look into how builders are weighing demand for the homes they've built and could be a good indication of housing demand going forward.

While manufacturing continues to contract, two reports released today suggest that things are slightly improving in the heavy sector. The ISM Manufacturing index remains below the level of 50 that separates expansion and contraction, but it also rose from the previous month, suggesting that activity has leveled off in the sector after plunging in April. Perhaps more importantly, key components – including reads on new orders, employment and production – rose by more than the overall index did. The IHS Markit Manufacturing PMI offered a similar conclusion, rising slightly to 39.8 in May, up from an all-time low of 36.1 in April. All this is to say that while manufacturers in this country continue to struggle, and conditions are a long way from normal, the worst damage caused by the coronavirus pandemic may be over with.

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