US home construction makes slow, steady comeback

July 18, 2012 - 8:43 PM
Housing Starts

In this Wednesday, June 20, 2012, photo, a worker stands in the early-morning sunlight on a home construction project in Newtown, Pa., Wednesday, June 20, 2012. U.S. builders broke ground on the most new homes and apartments in nearly four years last month, the latest evidence of a slow housing recovery. The Commerce Department said Wednesday that housing starts rose 6.9 percent in June from May to a seasonally adjusted. annual rate of 760,000. That's the highest since October 2008. (AP Photo/Mel Evans)

WASHINGTON (AP) — Builders are putting up more houses than they have in nearly four years, a long-awaited recovery that could help energize the U.S. economy.

From areas like Phoenix that are finally arising from the housing bust to Chicago and Minneapolis, where strong economies have lifted demand, the outlook for home building looks healthier than at any time since sales and prices collapsed in 2007.

"We've been hoping for this for a long time," said Celia Chen, a housing economist at Moody's Analytics. "It looks like things are turning."

The improvement has been gradual. But builders are responding to interest from buyers drawn by reduced prices, record-low mortgage rates and rising rents, which have made home purchases comparatively appealing. And the supply of new homes has shrunk to near-record lows.

The increased construction coincides with stronger homebuilder confidence and higher stock prices for building companies. The stocks of the 13 U.S. builders whose shares are publicly traded have increased an average 60 percent this year. By contrast, the Standard & Poor's 500 stock index is up about 9 percent.

Last month, U.S. builders broke ground on the most homes in nearly four years. Single-family home building — the bulk of the market — rose for a fourth straight month. Permits to build single-family homes reached their highest point since March 2010.

The news helped boost stock prices Wednesday. The Dow Jones industrial average closed up 103 points.

Home construction still has a long way to go. June's seasonally adjusted annual rate of 760,000 is the highest since October 2008. But it's only about half the 1.5 million annual pace that economists consider normal.

From the depth of the housing bust in April 2009, when the seasonally adjusted annual rate bottomed at 478,000 homes, the improvement has been slow but steady.

Building increased in early 2010 as the government's tax credits for home buyers lifted sales. Beginning that summer, the pace essentially stalled until late 2011, when it began rising gradually.

A continued resurgence would benefit an economy weakened by tepid job growth and sluggish consumer spending. A healthy pace of 1.5 million new homes a year would create about 50,000 additional jobs a month and lower the unemployment rate by about 1.5 percentage points, according to calculations by Joel Prakken of Macroeconomic Advisers. About half the new jobs would be construction workers and contractors; the others would be in related industries, like shipping and building materials.

The stepped-up construction would also add roughly 0.5 percentage point to annual economic growth, Prakken estimates.

Economists at IHS Global Insight, a consulting firm, caution that they don't foresee starts reaching 1.5 million a year until 2015. At the current lower levels, home construction will likely have only a modest effect on the economy.

New homes represent only about 20 percent of homes sold. Previously occupied homes were sold in May at a seasonally adjusted annual rate of 4.55 million. But each new home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to data from the home builders association.

Recoveries from recessions are typically powered by home construction, which creates jobs across many industries. This recovery has been different.

It followed a housing bubble in which construction averaged about 2 million homes a year from 2004 through 2006. The excessive building led to the housing crash, which depressed construction from 2009 through 2011.

The 2008 financial crisis — the worst since the Great Depression — left many people unable to finance a home purchase. That helps explain why construction has been painfully slow to recover. The economy has benefited only slightly.

But the pace of construction, and requests for permits, have picked up in many of the largest U.S. cities in the past year. Some of the gains reflect modest recoveries in areas where construction shrank drastically after the housing bubble burst. Demand for homes has begun to exceed the supply.

For example, permits issued in the past year for new homes in Phoenix were 85 percent higher than the year before, according to an estimate by Moody's Analytics. They were 76 percent higher in Miami. Nationwide, they rose 27 percent.

Cities that largely escaped the housing bust also are faring well. Permits have jumped 88 percent in Chicago, 53 percent in Minneapolis and 26 percent in San Diego. In these cities, construction has been so low for so long that normal population growth and demand for new homes have helped increase building.

In many cities that endured a boom and bust, developers are building in unfinished subdivisions, said Mark Vitner, an economist at Wells Fargo Securities. Land there is generally cheap. And builders can sell at prices low enough to compete with foreclosures.

Foreclosed homes, in turn, have become less attractive, Vitner noted. Most of the better properties have already been bought, many by investors. The ones left over are usually undesirable because they're far from city centers or in poor condition.

"It's like going to an after-Christmas sale after New Year's," Vitner said. "The best stuff is long gone."

Foreclosures are still ticking up nationwide, Chen said. But in some cities, such as Las Vegas, banks still face legal hurdles to foreclosing. That's keeping the overall supply of homes below demand and encouraging builders to step up construction.

Across the country, despite increased building, few new homes are available. There were only 145,000 new homes available in May — just above April's 144,000, which was the lowest on records dating to 1963.

Those trends are raising builders' confidence about the future. The National Association of Home Builders/Wells Fargo builder sentiment index this month jumped to its highest level since March 2007. The index is based on responses from 318 builders.

Builders also report higher turnouts by prospective buyers.

One such builder is McMillin Homes, which sells houses in Texas and California's Central Valley. It's ramped up construction this year.

Sales jumped 80 percent at McMillin's California communities in the first half of the year compared with the same period last year. And it plans to open five developments in Texas this year.

Customer traffic is up. And buyers are purchasing homes well before they're built. McMillin has also been able to raise prices.

"We see enough indicators that tell us we're coming off the bottom, finally," said Rey Ross, a senior vice president.

In its report Wednesday on home construction, the Commerce Department noted that the gains in single-family home building were broad-based: Housing starts rose in every U.S. region in June, led by the West.

"This was a good report," said Martin Schwerdtfeger, an economist at TD Bank.

The growth in construction permits "suggests that the momentum in building activity observed in recent months should carry forward," he said.

The housing market is improving even while the rest of the economy has weakened. Federal Reserve Chairman Ben Bernanke highlighted that gain in an otherwise gloomy report to Congress on Tuesday and Wednesday. Many economists say housing construction could contribute to overall economic growth this year for the first time since 2005.

As construction has increased, so have purchases. Sales of new homes rose in May to the fastest pace in more than two years. And while sales of previously occupied homes dipped in May, they were nearly 10 percent higher than a year earlier.

The economy is growing only modestly, and job creation has slowed sharply in the past three months. If those trends worsen, home building could slow in coming months.

Even Ross, the McMillin executive whose company is enjoying increased home sales, said those gains aren't enough to require hiring.

"We're not quite there yet," he said.

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AP Business Writers Paul Wiseman in Washington and Alex Veiga in Los Angeles contributed to this report.