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The outlook for construction brightens




November construction spending beat estimates, but that's pretty old news by now. I think the more important observation is that both residential and nonresidential construction appear to have hit bottom, as this chart shows. Residential construction has been flat for almost 3 years, and nonresidential construction has been flat for almost 2 years now.

Real estate markets operate with very long lags (typically 5 years or so), and construction activity has had plenty of time to adjust to the surplus of homes that appeared in 2006. That was a painful adjustment that required massive amounts of the economy's resources to shift from the construction sector to other sectors. Meanwhile the population continues to grow, the economy continues to grow, incomes continue to grow, and sharply lower real estate prices and historically low mortgage rates have allowed the market to unload a ton of excess housing inventory. The real estate problem, in short, most likely has been largely solved. Instead of worrying about whether more foreclosures are going to cause another price collapse and further reductions in construction activity, it makes more sense to wonder when construction activity and prices will begin to pick up, and by how much.

The good news, in other words, is that we have probably seen the end of the bad news in the housing and construction sectors. The lack of more bad news will optimism to return to a market that has been literally crushed by the worst setback in modern memory.

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