Bloomberg News

Builders Probably Began Work on Most U.S. Homes in Four Years

October 17, 2012

Builders Probably Began Work on Most U.S. Homes in Four Years

Concrete contractor Gary Wagenbach uses a rake to level pea gravel in the basement of a home being built by Blume Construction in East Peoria, Illinois. Photographer: Daniel Acker/Bloomberg

New-home construction in the U.S. probably rose in September to the highest level in four years, a sign the industry is in the initial stages of a recovery, economists said before a report today.

Builders broke ground on 770,000 houses at an annual rate, up from 750,000 starts in August and the most since October 2008, according to the median estimate of 80 economists surveyed by Bloomberg. Permits for new projects also probably increased.

A pickup in sales stoked by record-low mortgage rates and population growth combined with dwindling supply indicates construction can continue strengthening, contributing to economic growth. At the same time, housing starts are running at a quarter of their pre-recession peak, limiting how much the industry can boost the rate of expansion.

“Housing activity is definitely moving upward, but it has a long way to go” said David Berson, the chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “Household formations have picked up over the last year. As we get more households, builders are responding modestly by increasing construction.”

The Commerce Department will release the starts data at 8:30 a.m. in Washington. Estimates in the Bloomberg survey ranged from 735,000 to 800,000.

Building permits, a proxy for future construction, may have risen 1.1 percent to an 810,000 annual rate in September, according to the survey median.

Sales Improving

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.

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.

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.

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.

Mortgage Rates

Lower borrowing costs are helping bolster home demand as well. The average rate on a 30-year fixed mortgage 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.

Lending could be further stimulated by the Federal Reserve’s plan for open-ended purchases of mortgage-backed securities. Fed Chairman Ben S. Bernanke called housing “one of the missing pistons in the engine” in September as he announced the third round of quantitative easing, meant to boost growth and reduce unemployment.

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.

‘Pent-Up Demand’

“There is going to be a continued housing recovery over the next few years,” said Larry Seay, chief financial officer at Meritage Homes Corp. (MTH:US) in Scottsdale, Arizona, 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.”

Investors have also cheered the news. The Standard & Poor’s Supercomposite Homebuilder Index (S15HOME) has increased 80.6 percent this year through yesterday, outpacing a 15.7 percent gain for the broader S&P 500 (SPX) Index.

Weak employment growth, nonetheless, will probably prevent a rapid acceleration in the housing market. There were 12.1 million Americans unemployed in September, meaning incomes will be slow to grow.

To contact the reporter on this story: Alex Kowalski in Washington at akowalski13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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Companies Mentioned

  • MTH
    (Meritage Homes Corp)
    • $42.27 USD
    • -0.14
    • -0.33%
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