October 17, 2012 2:26 pm

US housing starts surge in September

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New home construction in the US surged in September to its fastest pace in more than four years, offering further evidence that the housing sector was regaining strength after years in the doldrums.

The data could be of aid to President Barack Obama’s re-election campaign, particularly in battleground states such as Florida and Nevada. These states were among the hardest hit by the housing crisis, suffering from big job losses in the construction sector amid vast swaths of property in foreclosure.

But the rebound in the housing sector – though it remains in its early stages – could make many Americans feel better about economic conditions as they head to the polls on November 6.

Housing starts rose 15 per cent last month to a seasonally adjusted annual rate of 872,000 units, commerce department data showed on Wednesday. While data on housing starts is volatile and can be revised frequently, this was the quickest pace since July 2008.

The data beat the previous month’s upwardly revised level of 758,000 and came ahead of analysts’ expectations of 765,000 units.

Many Americans have felt confident about moving ahead with home purchases, spurred by record low mortgage rates and the bottoming out of house prices.

Building permits – a proxy for future construction – rose 11.6 per cent to 894,000 in September. The number of permits is up 45.1 per cent from the same month in 2011.

The strength of the housing sector comes on the back of a relatively encouraging jobs report for September – which showed the US unemployment rate dip unexpectedly from 8.1 per cent to 7.8 per cent. However, payroll formation as measured by a separate survey remained sluggish at 114,000.

The signs of life in housing come amid concerns about waning health in the manufacturing sector, which has been one of the bright spots of the recovery. But the global slowdown in particular may be damping activity – and hurting jobs growth – in industrial America.

Yet Wednesday’s housing start report is undoubtedly encouraging for the economy.

In the multi-family component – taking into account apartment blocks – new construction advanced 25.1 per cent. The multi-family sector has been a source of strength as many Americans are still compelled to rent, rather than buy, against a backdrop of tight credit conditions and strict mortgage requirements that are keeping many potential homebuyers from making purchases.

September groundbreaking for single-family homes, the largest segment of the market, rose 11 per cent to a 603,000-unit pace, the highest level since August 2008.

David Berson, chief economist at Nationwide, said while Wednesday’s numbers may be overstated, particularly in the multi-family component, the underlying upward trend in single-family home demand is important.

“Builders are not going to start constructing these homes unless they are absolutely convinced they are going to sell them. There are very few who are building speculatively as their lenders will not let them do that,” he said.

Data on Tuesday showed the National Association of Home Builders/Wells Fargo housing market index rose for a sixth straight month to 41, the highest reading since June 2006 as home builders felt more confident about the US economy and housing market conditions. The overall level of the index, which is out of 100, remains low compared to historic levels. Readings below 50 indicate that more respondents reported conditions were poor.

The housing starts rate is still only at 40 per cent of its peak in January 2006, a sign that the recovery still has a long way to go.

“Existing home supply, which includes distressed homes, is still very large and so this is an impediment to the new home construction market. But this is declining,” Mr Berson added.

National Association of Realtors data show there are 2.47m previously owned homes on the market. During a regular housing cycle it is normal to see this level at about 2m.

But while the housing market is in recovery mode, economists such as Jim O’Sullivan, at High Frequency Economics, said the sector was much less important to US economic growth than it used to be.

“Total residential investment directly accounts for 2.4 per cent of gross domestic product now, down from a 6.3 per cent peak in 2005. Within that, new home construction, the part tracked by housing starts, accounts for 0.9 per cent of GDP now, versus a peak of 3.9 per cent in 2005,” he said.

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