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Home starts jump to four-year U.S. high

story by Alex Kowalski and Prashant Gopal
Bloomberg News

Housing starts in the U.S. surged 15% in September to the highest level in four years, adding to signs of a revival in the industry at the heart of the financial crisis.

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 (Oct. 17) 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,” said Larry Sorsby, chief financial officer of Red Bank, N.J.-based Hovnanian Enterprises Inc., the best-performing homebuilding stock this year. “There is clear evidence that we have bounced off the bottom and are in the midst of a recovery.”

Sales gains stoked by record-low mortgage rates, dwindling supply and population growth indicate construction by builders like Meritage Homes Corp. and Lennar Corp. can continue strengthening and contribute 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, N.C.-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.”

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% annual pace in the third quarter. Gains in retail sales and industrial production in September both exceeded 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% more homes, the biggest year-over-year gain since April.

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 in Scottsdale, Ariz., 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.”

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% since September 2011, the biggest annual jump since 1983.

Construction of single-family houses climbed 11% from August to a 603,000 rate. Work on multifamily homes, such as apartment buildings, increased 25.1% 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% jump. The South and Midwest also showed increases, while the Northeast had a decline.

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% in 2011, the biggest gain in 10 years, to 119.9 million, according to the most recent Census Bureau data.

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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.

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% 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 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.

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