Residential Real Estate and Homebuilders and Home Sales and Housing Starts and Construction and Real Estate & Retail

Builders betting on brighter U.S. housing market

March 21, 2012

U.S. builders are betting that the housing market is finally on the path back to health.

They requested 5 percent more permits in February to build single-family homes and apartments in the coming months. That increased the annual rate to a seasonally adjusted 717,000 permits, the Commerce Department said Tuesday.

While that's still half the rate considered healthy by most economists, it's the highest since October 2008.

"This report is one of the more encouraging new construction reports we have seen in the last four years," said Patrick Newport, an economist with IHS Global Insight.

In central Indiana, building permits rose 40 percent in February compared to the same month a year ago, IBJ reported March 14.

Builders have grown more confident over the past six months after seeing more people express interest in buying a home.

The rise in permits suggests builders see that interest translating into sales over the next 12 months. That's how long it typically takes to build a home after a permit is obtained.

Economists cautioned that construction levels remain depressed and the housing market has a long way to go before it is back to full health.

In an indication of that challenge, the government said builders broke ground on slightly fewer homes in February. The seasonally adjusted rate of 698,000 housing starts fell from January's revised level of 706,000, which was the highest since October 2008.

"The key numbers in this report are the housing permits_not the starts," said Newport. "The permits are better measured than starts, are less influenced by weather and are forward looking."

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said he expects further gains over the next few months.

"Housing will add to growth all year, and beyond," Shepherdson said.

A mild winter allowed builders to keep working in most parts of the country. And an improving job market has many slightly more optimistic about home sales this year.

Newport said 2012 should be a better year for construction of homes. He projects 745,000 homes will be started, up from 611,000 last year. Two-thirds are likely to be apartments and condos, reflecting pent-up demand for housing among young adults who are living with their parents.

Builders are starting to see some signs of progress. They are more confident after seeing more people express interest in buying a home. Mortgage rates are hovering near record lows below 4 percent. And home sales started to rise at the end of last year.

Though new homes represent just 20 percent of the overall home market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

There are some hurdles to a smooth recovery: Builders are struggling to compete with deeply discounted foreclosures and short sales — when lenders allow homes to be sold for less than what's owed on the mortgage.

After previous recessions, housing accounted for at least 15 percent of U.S. economic growth. Since the recession officially ended in June 2009, it has contributed just 4 percent.

Another reason sales have fallen is that previously occupied homes have become a better deal than new homes. The median price of a new home is about 30 percent higher than the median price for a re-sale. That's nearly twice the markup typical in a healthy housing market.

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