Housing Construction Surge—Sign of Better Times?

The Mortgage Corner

U.S. housing starts jumped to their highest level in nearly 7-1/2 years in April and permits soared, hopeful signs for an economy that is struggling to regain strong momentum after a dismal first quarter. And that is exciting economists that say it could mean better economic growth ahead.

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Graph: Calculated Risk

This is while Total existing–home sales, which are completed transactions that include single–family homes, townhomes, condominiums and co–ops, declined 3.3 percent to a seasonally adjusted annual rate of 5.04 million in April from an upwardly revised 5.21 million in March. But despite the monthly decline, sales have increased year–over–year for seven consecutive months and are still 6.1 percent above a year ago, reports the National Association of Realtors.

The strength in housing is in stark contrast with weakness in consumption, business spending and manufacturing, which have prompted economists to lower their second-quarter growth estimates and raised doubts that the Federal Reserve will raise interest rates before the end of the year.

Of course lower interest rates are the main factor in housing activity, as housing affordability has been increasing this year, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI).

Groundbreaking for new construction surged 20.2 percent to a seasonally adjusted annual pace of 1.14 million units, the highest since November 2007, the Commerce Department said on Tuesday. The percent increase was the biggest since February 1991. March’s starts were revised up to a 944,000 unit rate instead of the previously reported 926,000 unit pace.

And privately-owned housing units authorized by building permits in April were at a seasonally adjusted annual rate of 1,143,000. This is 10.1 percent above the revised March rate of 1,038,000 and is 6.4 percent above the April 2014 estimate.

“The rebound in permits points to solid starts and construction in the months ahead. After the weather-related weakness in starts during Q1, we think the April data are consistent with housing activity returning to normal,” wrote Barclays economists.

Whereas NAR chief economist Lawrence Yun says existing-home sales in April failed to keep pace with the robust gain seen in March. “April’s setback is the result of lagging supply relative to demand and the upward pressure it’s putting on prices,” he said. “However, the overall data and feedback we’re hearing from Realtors® continues to point to elevated levels of buying interest compared to a year ago. With low interest rates and job growth, more buyers will be encouraged to enter the market unless prices accelerate even higher in relation to incomes.”

Existing sales have been above the 5 million annual rate for 2 consecutive months and home prices are rising, which mean supply is still a problem and why there will be increased demand for new home construction.

The median existing–home price for all housing types in April was $219,400, which is 8.9 percent above April 2014. This marks the 38th consecutive month of year–over–year price gains and is the largest since January 2014 (10.1 percent). So with demand far exceeding supply, properties sold in April faster (39 days) than at any time since July 2013 (42 days) and the second shortest time (37 days in June 2013) since NAR began tracking in May 2011.

“Housing inventory declined from last year and supply in many markets is very tight, which in turn is leading to bidding wars, faster price growth and properties selling at a quicker pace,” says Yun. “To put it in perspective, roughly 40 percent of properties sold last month went at or above asking price, the highest since NAR began tracking this monthly data in December 2012.”

Need we say more about the prospect for higher housing starts this year, and what it should do for economic growth? New-home construction in particular gives a big boost to employment in the various industries—such as insurance, building materials, professional services—that service the housing market.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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