Surge in US Home Construction Could Lift Economy

Mon October 22, 2012 - National Edition
Alex Veiga and Martin Crutsinger - ASSOCIATED PRESS

Paul Ashworth, an economist at Capital Economics, thinks housing will slowly recover over the next several years
Paul Ashworth, an economist at Capital Economics, thinks housing will slowly recover over the next several years

U.S. home construction is making a comeback that could invigorate the economy’s still-weak recovery.

Builders last month started construction on single-family houses and apartments at the fastest rate in more than four years, the Commerce Department said last week. And they laid plans to build homes at an even faster pace in coming months - a signal of their confidence that the housing rebound will last.

The pace of construction has grown steadily in the past year, and analysts expect it to keep rising. The increase has been fueled by record-low mortgage rates, more stable home prices and a shortage of previously occupied homes for sale.

More new homes could accelerate growth and help boost hiring, especially in areas like construction, home improvement and retailing. More homeowners lead to more people buying home furnishings.

“I don’t have that crystal ball, but I will say we’re seeing the best sales we’ve seen in five years, and it sure feels good,” Douglas Yearley, CEO of Toll Brothers Inc., said in an interview with The Associated Press. Toll builds luxury homes in 20 states.

The government’s report last week on home construction in September was filled with encouraging details.

Overall, the number of homes that were started increased 15 percent from August to a seasonally adjusted annual rate of 872,000. That’s the fastest rate since July 2008.

Single-family homes, which made up more than two-thirds of the new construction, rose 11 percent to 603,000. That was also the quickest rate in four years. Apartment construction, which can be more volatile from month to month, rose 25.1 percent.

And applications for building permits, a sign of future construction, jumped nearly 12 percent to an annual rate of 894,000, another high point since July 2008.

The rate of new construction has surged more than 38 percent in the past 12 months.

Housing starts are now 82.5 percent above the annual rate of 478,000 in April 2009, the recession low. It’s still well short of the 1.5 million annual rate that economists consider healthy. And it’s far below the more than 2 million homes started in 2007 - the peak of the boom. But the steady upward trend appears likely to endure, analysts say.

“The housing market is improving, and there is no reason to think that this will not continue going forward,” said Patrick Newport, U.S. economist at IHS Global Insight.

The surprisingly robust construction data helped push stocks modestly higher. And the prices of homebuilder stocks rose sharply.

The report came a day after the National Association of Home Builders said confidence among builders had reached a six-year high. The group’s index has been rising over the past year.

Home buying is likely to expand now that the Federal Reserve is buying mortgage bonds to try to push record-low long-term mortgage rates even lower.

Newport said housing starts should climb to 950,000 next year and to 1.27 million in 2014. By 2015, he said construction should exceed 1.5 million.

Newport also predicts that housing will add about 0.25 percentage point to overall economic growth this year. If that forecast proves accurate, it would be the first year that housing has been a positive factor for economic growth in five years.

“The rest of the economy is still struggling, but housing is doing better because as the population grows, we need new houses to meet that demand,” Newport said.

The seasonally adjusted annual rate of new-home sales was nearly 28 percent higher in August than in the same month last year. Even with those gains, sales remain far below historically normal levels. Economists say more jobs and higher pay are needed to help accelerate sales.

Though new homes represent less than 20 percent of housing sales, they exert an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the home builders group.

“We’ve had huge pent-up demand now for five years where people just weren’t buying houses, and they’re coming back out,” Yearley said. “It’s been very encouraging.”

Yearley expects much of Toll Brothers’ construction in coming months to occur in its hottest markets. Those are mainly in the coastal corridor from Boston to Washington, where land for development is limited and there are many higher-income homebuyers.

The New York City metro area has been the company’s strongest market. Toll Brothers is building its 16th high-rise there. It expects to put up more homes in Dallas, Houston, California and Florida, among other markets.

Still, while Toll is building more, it has yet to increase hiring much. In 2005, when the housing bubble was expanding, the company’s payroll peaked at 7,000. As with other builders, its payroll shrank during the housing downturn, bottoming at 2,200 in 2009.

The company has so far brought back more than 500 former employees.

“We’re not overhiring,” Yearley said. “We’re still at a sort of as-needed basis, which I think is very smart, considering what we’ve been through.”

The overall construction industry shed jobs well after the recession officially ended in June 2009, according to government data. Employment fell from more than 6 million in June 2009 to 5.46 million in January 2011.

The industry has added few jobs since. Construction employment numbered just 5.52 million in September.

Paul Ashworth, an economist at Capital Economics, thinks housing will slowly recover over the next several years. Along with higher consumer spending, housing is modestly boosting economic growth. But it’s also being offset by lower business investment in machinery and computers and declining exports.

If, as Ashworth expects, housing starts reach about 1.5 million by mid-2015, the industry would add about 1 million jobs by then, or about 30,000 a month.

Housing is “the one sector of the economy that’s seeing any improvement,” Ashworth said.