Housing starts at four-year high boost U.S. expansion

story by Shobhana Chandra
Bloomberg News

New-home construction unexpectedly climbed to a four-year high in October, more evidence of a revival in the industry that’s helping propel the U.S. economy.

Housing starts rose 3.6% to a 894,000 annual rate, the fastest since July 2008 and exceeding all estimates in a Bloomberg survey, Commerce Department figures showed today (Nov. 20) in Washington. The median forecast of 82 economists called for an 840,000 pace. Permits for the construction of single-family homes also advanced to the highest in four years.

“The housing industry is in a recovery,” said Larry Sorsby, chief financial officer of Red Bank, N.J.-based Hovnanian Enterprises Inc. “Those builders that survived the unprecedented downturn of the last six years are in a good position not only to survive but to thrive.”

Record-low mortgage rates and a lower risk that property values will keep falling may continue to attract buyers, giving the economy a lift and benefiting companies such as Hovnanian, New Jersey’s largest builder. The Federal Reserve is buying $40 billion a month in housing debt to keep down borrowing costs, and Chairman Ben S. Bernanke this month said the central bank will do what it can to bolster the industry.

Today’s figures indicate that “we’ll have bigger support from housing” for the economy, said Harm Bandholz, chief U.S. economist at UniCredit Group in New York, who projected 870,000 starts at an annual rate. “Excess supply has been wound down and there’s a steady increase in demand. That’s good for construction.”

A separate report today from the Labor Department showed that payrolls increased in 35 states in October, while the unemployment rate dropped in 37, showing much of the job market is gaining traction.

California led the nation with a 45,800 advance in employment, followed by Texas with 36,600 more jobs. The jobless rate dropped the most in South Carolina, Alaska and Wisconsin.

Housing starts are the latest in a batch of data showing a pickup in momentum. An index of homebuilder sentiment rose to a six-year high this month, and sales of existing homes were stronger than forecast in October. Residential construction added 0.3 percentage point to third-quarter economic growth of 2%.

Economists at Barclays said in an e-mail that they raised their tracking estimate of the increase in fourth-quarter gross domestic product to 2.2% from 2% after today’s report.

The Commerce Department, in a statement accompanying the data, said superstorm Sandy had a “minimal” effect on estimates of new residential construction for October. The agency said the number of “non-responses” to its building permits survey was “not significantly higher than normal.”

Total building permits decreased 2.7% to an 866,000 annual rate from 890,000 in September. They were projected to fall to 864,000, according to the survey median. The drop in October permits reflected fewer applications for multifamily construction, while those for one-family units rose to the highest level since July 2008.

Construction of single-family houses eased 0.2% to a 594,000 rate from 595,000 the prior month, today’s report showed. Work on multifamily homes, such as apartment buildings and condominiums, jumped 11.9% to an annual rate of 300,000.

Two of four regions had an increase in starts in October, led by a 17% surge in the West, today’s report showed. In the Midwest, new construction rose 8.9%. Starts dropped 6.5% in the Northeast and 2.5% in the South.

The National Association of Home Builders/Wells Fargo index of builder confidence climbed in November to a six-year high of 46, the Washington-based group said yesterday. The group’s gauge of current single-family home sales advanced to the highest level since May 2006 as it jumped by the most since September 2002.

Purchases of previously-owned houses rose 2.1% in October to a 4.79 million annual rate, exceeding the median forecast of economists surveyed by Bloomberg, the National Association of Realtors reported yesterday. Inventories dropped to the lowest level in almost a decade.

Toll Brothers Inc., a Horsham, Pa.-based luxury homebuilder, is among companies saying the market probably will keep improving.

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“We’re in a strong phase of the recovery,” Martin Connor, chief financial officer, said during a conference presentation on Nov. 15. “It’s a function of five years of pent-up demand being released,” and “affordability and rising prices is also spurring people to buy.”

Low borrowing costs and cheaper properties indicate home buying is coming within reach of more Americans. The average rate on a 30-year fixed mortgage dropped to 3.34% in the week ended Nov. 15, the lowest in records dating to 1971, according to McLean, Va.-based Freddie Mac.

“Continued weakness in housing – reflected in falling prices, low rates of new construction, and historic levels of foreclosure – has proved a powerful headwind to recovery,” Bernanke said in a Nov. 15 speech in Atlanta. “It is encouraging, therefore, that we are seeing signs of improvement in the housing market in most parts of the country.”

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