August Construction Spending and MBA Application Data Support These Holdings

While the overall market is feeling the brunt of escalating Middle East tensions and the early days of port strikes, you may have noticed several of our construction-related holdings are moving higher today. The catalyst for the day’s outperformance of United Rentals URI, Builders FirstSource BLDR, and Waste Management WM can be attributed to the favorable data in the August Construction Spending report. We recently boosted our price targets for URI and BLDR shares and reaffirmed our $300 target for Vulcan Materials VMC.

What we found pertaining to URI, VMC, and WM can be surmised in the following chart — continued gains, up 4.3% year over year in total August public nonresidential construction spending. On a non-seasonally adjusted basis that spending rose 6.5% year over year in August.

In the August Housing Starts report, total starts climbed almost 5% higher compared to August with single-family starts hitting their highest level since April. Adding in the rebound in multi-family housing during the month and total housing starts hit their highest levels since March. That set the stage for favorable residential construction figures in today’s August Construction Spending report and that is what we got. Year over year, total residential construction rose 2.7% in August with total private residential construction up 2.6% compared to year-ago levels.

Weekly Mortgage Bankers Association (MBA) mortgage application data have been improving as mortgage rates have been declining. However, looking at MBA’s monthly new home purchase mortgage applications data helps explain the improving outlook for housing construction and Builders FirstSource.

* July 2024 mortgage applications for new home purchases increased 9.4% year over year and rose 9% compared to June 2024.

* August 2024 mortgage applications for new home purchases increased 4.4% year over year and were flat with July 2024 levels. During the month, MBA estimated new home sales increased almost 15% over the month, reaching the fastest sales pace since February 2022.

We should be getting the September figures from MBA in around two weeks. With Bankrate showing the current average interest rate for a 30-year fixed mortgage is 6.26% compared to almost 6.6% in mid-August and roughly 7% in mid-July, we would be surprised if the year-over-year gains in mortgage applications for new home purchases in September failed to emerge.

As the Fed moves down the rate-cut curve in the coming quarters, we continue to think we will see a pickup in overall construction activity as project hurdle rates and borrowing costs continue to improve.

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At the time of publication, TheStreet Pro Portfolio was long URI, BLDR, WM and VMC.