Housing Starts Jump 15% to Four-Year U.S. High: Economy

Beginning home construction jumped last month to an 872,000 annual rate, the fastest since July 2008 and exceeding all forecasts in a Bloomberg survey of economists, Commerce Department figures showed today in Washington. An increase in building permits may mean the gains will be sustained.

“It’s no longer a question of whether the industry is rebounding,” Larry Sorsby, chief financial officer of Red Bank, New Jersey-based Hovnanian Enterprises Inc. (HOV), the best-performing homebuilding stock this year, said in a telephone interview today. “There is clear evidence that we have bounced off the bottom and are in the midst of a recovery.”

A pickup in sales stoked by record-low mortgage rates and population growth combined with dwindling supply indicates construction can continue strengthening, contributing more to economic growth. Improving demand may also help revive a part of the job market that’s seen construction employment fall by almost 2 million since the end of 2007.

“This is good news for the labor market,” said Anika Khan, a Charlotte, North Carolina-based senior economist at Wells Fargo & Co., the biggest mortgage lender in the U.S. If single-family starts “continue to show this positive momentum, and we expect they will, we’ll likely start to see some construction jobs come back.”

Builders, Lumber

Shares of homebuilders and lumber futures rallied after the report. The Standard & Poor’s Supercomposite Homebuilding Index (S15HOME), which includes Toll Brothers Inc. (TOL) and Lennar Corp. (LEN), climbed 3.2 percent to 448.18 at 4 p.m. The broader S&P 500 rose 0.4 percent to 1,460.91.

The contract on softwood lumber expiring in January advanced 3.3 percent on the Chicago Mercantile Exchange. Lumber has surged $44 per 1,000 board feet in the last week.

In the U.K. today, a report from the Office for National Statistics showed that jobless claims unexpectedly fell in September and payrolls rose to a record in the quarter through August as the London Olympics helped boost hiring.

The jump in U.S. housing starts is the latest sign that the world’s largest economy is gaining strength after growth slowed to a 1.3 percent annual pace in the third quarter. Gains in retail sales and industrial production in September both exceeded economists’ forecasts.

Economists’ Forecasts

The median housing starts projection in the Bloomberg survey called for a 770,000 pace, and estimates ranged from 735,000 to 800,000. The prior month was revised up to 758,000 from a previously reported 750,000 pace.

Over the past 12 months, work began on 34.8 percent more homes, the biggest year-over-year increase since April.

“This data is catching up to the orders numbers that the homebuilders have been reporting for the last six months,” Martin Connor, chief financial officer for Toll Brothers said in a telephone interview. “It is reflective of the increased consumer confidence and buyer confidence that pricing is going up and it won’t be cheaper tomorrow.”

Horsham, Pennsylvania-based Toll Brothers, the largest U.S. luxury-home builder, reported a 57 percent increase in orders for the quarter ending in July over the previous year.

Less Pessimistic

The brighter building environment has made construction companies less pessimistic. The National Association of Home Builders/Wells Fargo builder sentiment index increased to 41 this month, the highest since June 2006 and the sixth-straight gain, figures showed yesterday. Still, readings below 50 mean more respondents said conditions were poor.

“There is going to be a continued housing recovery over the next few years,” Larry Seay, chief financial officer at Meritage Homes Corp (MTH).in Scottsdale, Arizona, said during an investor conference on Oct. 11. “Pent-up demand that has built up from people deferring household formation is going to help buoy the recovery. High affordability not only with house prices being very low, but also interest rates being as low as they’ve been in decades, and all that translating into an improved buyer confidence.”

Miami-based Lennar, the third-largest U.S. homebuilder by revenue, said Sept. 24 that its quarterly profit more than quadrupled as demand for new houses climbed. Third-quarter revenue rose to $1.1 billion from $820.2 million a year earlier. New orders climbed 44 percent to 4,198 homes, and contract backlogs, an indication of future sales, increased 79 percent.

Building Permits

Building permits, a proxy for future construction, jumped to an 894,000 annual rate, also exceeding the median forecast and the fastest since July 2008, the Commerce Department’s figures showed. They were projected to rise to 810,000, with a range of 780,000 to 850,000.

The number of permits swelled by 45.1 percent since September 2011, the biggest annual jump since 1983.

Construction of single-family houses climbed 11 percent from August to a 603,000 rate. Work on multifamily homes, such as apartment buildings, increased 25.1 percent to an annual rate of 269,000.

Demand for apartments nationwide is the strongest in a generation because of home foreclosures, stiffer lending standards and a growing number of young adults forming households.

The West showed the biggest gain in housing starts last month, with a 20.1 percent jump. The South and Midwest also showed increases, while the Northeast had a decline.

Boom to Bust

California, the state that led the U.S. into the housing boom and bust with some of the most reckless subprime mortgage lending, is now leading the way out.

A plunge in new defaults in California helped push U.S. foreclosure filings to the lowest level in five years last month, according to RealtyTrac Inc., a seller of home-loan data. The median price paid for a home in the state rose to $287,000 in September, the highest since August 2008, according to real estate research firm DataQuick.

At Hovnanian, orders in California climbed 31 percent in the nine months that ended in July and jumped 46 percent in Phoenix, Sorsby said.

“These markets were hit hard and now people are seeing home prices start to increase,” he said. “There is pent-up demand.”

A harbinger of progress for homebuilders, demand for new homes has hovered at a two-year high. Homes sold at a 373,000 annual pace in August and at a 374,000 rate in July, the best two months since the March-April 2010, according to Commerce Department figures.

Population Growth

That demand may, in part, be driven by a growing population. The number of households in the U.S. grew 2 percent in 2011, the biggest gain in 10 years, to 119.9 million, according to the most recent Census Bureau data.

Sales offices for new home communities are also drawing in traditional homebuyers who face growing competition from investors for a dwindling supply of existing houses.

Private-equity firms such as Colony Capital LLC and Blackstone Group LP are buying foreclosed homes and later renting them out. Such purchases have helped drive prices up 34 percent in a year in places like Phoenix.

Housing starts plummeted during the recession, with the three years between 2009-2011 marking the worst period for homebuilding in records going back to 1959. Starts reached a pre-recession peak of 2.1 million in 2005, the most in more than 30 years, before slumping to a low of 554,000 in 2009.

Supply Diminishes

As a result, the supply of new homes available for purchase has diminished. There were enough properties on the market in August to last 4.5 months at the current sales pace, matching July as the lowest level in almost seven years, Commerce Department figures show.

Housing, which traditionally leads economic recoveries, has lagged this time because the financial crisis led to the first nationwide decline in home prices since the Great Depression, leaving many homeowners with loans that exceeded the value of their homes.

Residential construction contributed 0.2 percent points to gross domestic product in the second quarter of this year after 0.4 point in the first three months.

In September, Federal Reserve Chairman Ben S. Bernanke called housing “one of the missing pistons in the engine” as he announced the third round of large-scale asset purchases intended to push down long-term interest rates and spur growth.

Now some policy makers are starting to take note of the revival.

‘Signs of Life’

“Housing is once more showing signs of life,” John Williams, president of the Federal Reserve Bank of San Francisco, said in a speech this week. “The housing recovery includes a rebound in home construction, something particularly important for the health of the overall economy.”

Borrowing costs pushed lower by the Fed are bolstering home demand, even as tighter credit standards make it harder for many Americans to get a mortgage. The average 30-year fixed rate was 3.39 percent in the week ended Oct. 11, near a record-low of 3.36 reported Oct. 4, according to data from Freddie Mac that dates back to 1971.

Weak employment growth is an obstacle to a rapid housing recovery. There were 12.1 million Americans unemployed in September, meaning incomes will be slow to grow.