Single-family houses fuel gains in US homebuilding

Rise in housing starts reflects increased sense of financial security amid steady job growth, modest lay-offs and relatively low mortgage rates

PUBLISHED : Tuesday, 25 August, 2015, 10:32pm
UPDATED : Tuesday, 25 August, 2015, 10:32pm

US builders started work on single-family houses last month at the fastest pace since the recession began in late 2007.

Housing starts in July rose 0.2 per cent to a seasonally adjusted annual rate of 1.21 million homes, the Commerce Department said. Construction of single-family houses accounted for all of the gains, shooting up 12.8 per cent last month to the highest rate since December 2007.

The increase pointed to a housing market that has strengthened for much of the year, reflecting an increased sense of financial security for many Americans amid steady job growth, modest lay-offs and relatively low mortgage rates. Continued gains in housing would help extend the current economic expansion.

"More housing starts means more construction jobs as well as confidence from real estate developers that people will be buying," said Tara Sinclair, a George Washington University professor and chief economist for job site Indeed. "We'll know the economy is really hitting stride when we see these starts in the range of 1.5 million."

It is in all likelihood going to take another leg up in new single-family home sales to sustain the pace of single-family starts that was recorded in July
Joshua Shapiro, chief US economist, MFR

Total housing starts have risen 11.3 per cent for the year to date. The market is attracting more buyers and renters, as starts for apartment buildings have climbed 12.2 per cent so far this year despite last month's drop.

The improved housing market has already benefited sales at supply stores such as Home Depot. The world's largest home improvement retailer reported that sales at US stores open at least one year had climbed 5.7 per cent during the second quarter.

But the report also showed the potential limits of further gains from new construction as the number of building permits fell, a possible sign that demand will need to continue improving to further the pace of homebuilding.

"It is in all likelihood going to take another leg up in new single-family home sales to sustain the pace of single-family starts that was recorded in July," said Joshua Shapiro, the chief US economist at consultancy MFR.

Approved building permits decreased 16.3 per cent in July to an annual rate of 1.12 million after an eight-year high in June.

The decrease likely reflects some pullback after months of gains and was caused by a sharp plunge in permits to build apartment complexes after a tax break expired in New York.

Homebuyers and renters have crowded into the housing market this year, pushing up prices to levels that have worsened affordability and placed a potential cap on sales growth.

Builders have relieved some of this financial pressure by ramping up construction, yet the increases in housing starts and building permits still lag the surging demand.

The National Association of Home Builders/Wells Fargo builder sentiment index reached 61 this month, up from 60 in July. Any reading above 50 signals expansion.

Still, only 5.4 months' supply of new homes is available, compared to six months in a healthy market.

In the rental sector, prices are increasing at double the rate of hourly wage growth largely because of fewer vacant apartments available. Home rental prices are up 4.3 per cent in the past year, according to real estate firm Zillow. Average hourly earnings have improved a mere 2.1 per cent.

Developers are addressing the recent shift to rentals as more baby boomers start to downsize and millennials rent longer before buying their first homes.

Real estate firm Trulia found that permitting activity for apartment complexes has surged well above the historical average in many markets.

In the New York City metro area, building permits for multi-family complexes is an astounding 423 per cent higher than the 24-year average. The increase is 295 per cent in Boston, 138 per cent in Philadelphia, 161 per cent in Los Angeles, 102 per cent in San Francisco and 114 per cent in Houston.

"A lot of this has been in the works for a while," said Selma Hepp, chief economist at Trulia. "Builders plan well ahead - and so looking at the demographic trends they knew would be coming into full force, they wanted to take advantage of that."

The increased demand primarily reflects an economy operating from a stronger foundation of hiring as the recovery enters its seventh year.

Employers added 215,000 jobs in July, while the unemployment rate held at 5.3 per cent for the second consecutive month. The economy has benefited from nearly three million new jobs in the past year, which has boosted the housing and construction sectors.

Low mortgage rates have also helped sales. The average 30-year, fixed mortgage rate was 3.94 per cent last week, according to mortgage firm Freddie Mac. That is roughly two percentage points below the historical average.