Home Building Surges as Confidence Grows
New homes under construction in Edmond, Okla., in September.
Residential construction picked up momentum in September and now is running at its highest level in four years, a turn that could have a positive effect on the jobs market and the broader U.S. economy.
Builders started work on new houses and apartments at a seasonally adjusted annual rate of 872,000 units last month, the Commerce Department said Wednesday, up 15% from August and 34.8% from September a year ago, far exceeding economists’ expectations. The level of starts was the highest since July 2008.
Many economists contend that the rise in construction, if sustained, could boost job creation and economic growth. The National Association of Home Builders, a trade group, estimates that each home built generates three full-time jobs and $90,000 in new tax revenue.
"The path between here and when we get to a sustainable pace of home building, should add, cumulatively, up to two percentage points" to the nation’s gross domestic product, said Michael Feroli, chief U.S. economist at J.P. Morgan Chase & Co. "It could take three or four years, but at the pace we’re going at now, we might get there sooner rather than later."
The government report showed new building was up in three of four U.S. regions. Building rose 20.1% in the West, 19.9% in the South and 6.7% in the Midwest. New construction fell 5.1% in the Northeast.
Some economists say a continued rise in construction could further drive down the unemployment rate, which fell to 7.8% in September from 8.1% in August. Between 2007 and 2011, more than 2.1 million construction workers lost their jobs, according to the Bureau of Labor Statistics, and since then, only 273,000 have been hired back.
The recent growth in residential building "gives some hope in the coming months for more construction jobs," said Anika Khan, a senior economist with Wells Fargo WFC +2.19% . "A lot of construction workers are the ones who have been discouraged and underemployed, on the sidelines. If these particular workers find work, it will have a big overall economic impact, because it will boost wage and salary growth and income growth."
In September, the number of new building permits, an indication of future construction, rose 11.6% to an annualized level of 894,000, also the highest level since July 2008.
Starts on single-family homes, which made up 69% of housing starts last month, rose 11% in September to a rate of 603,000 units, a 43% improvement from a year earlier.
The pop in home building also suggests a divide between consumers and industry in the economic recovery.
While businesses continue to hold back on big investments because of uncertainty surrounding the coming elections and changes to the tax code, consumers’ attitudes are brightening, pushing up spending on goods such as new homes.
"Consumption indicators seem to be pretty strong, while investment indicators seem to be pretty weak," said Paul Ashworth, chief U.S. economist for Capital Economics. "The fiscal cliff and what’s happening in Europe should be driving consumption and industrial numbers in the same direction. But in this case, consumers don’t seem to be as aware as businesses are."
Craig Perry, president of Centerline Homes, a Coral Springs, Fla., builder, said in the past six months he has started construction at three developments in Orlando and Broward County in South Florida, and nearly all 136 homes in the communities are under contract.
"We’re seeing a much better attitude among buyers," Mr. Perry said. "People feel like home prices are rising, and mortgage rates are very low. So before prices rise too high, people want to get in on it."
Another reason for the jump in new-home construction is that inventories of previously owned homes and foreclosed homes have declined, spurring some buyers to begin looking at new properties.
The National Association of Realtors reported last month that at the current pace of sales, it would take 6.1 months to sell the listed supply of homes, down from 8.2 months of supply a year ago.
This month, CoreLogic Inc., CLGX +0.76% a real-estate data company, said the "shadow inventory," or the pending supply of homes that are delinquent or in foreclosure and could ultimately be listed for sale, fell to 2.3 million units in July, or a supply of 6.0 months, down 10.2% from a year earlier.
Ilin Misaras, who coordinates international programs for students at North Carolina State University, and her husband recently paid $500 to a builder in Raleigh, N.C., to reserve a piece of land for a four-bedroom house to be built next year. The couple plans to pay about $245,000 for the home and aims to move in next August.
Ms. Misaras, who is 30 years old, said she and her husband are watching their spending. They canceled a trip to England, France and Italy to put the money toward their new home—but they aren’t worried about the economy.
"We are looking at the economy, especially in our area, the Triangle, as skyrocketing right now," Ms. Misaras said.
Once she gets a pending pay raise and her husband finishes his studies to become a registered nurse, she expects their household income will go up. "The stars are just kind of aligned for us right now," she said.
While this year’s housing starts are up from a low of 478,000 in April 2009, they are still below the historical average. Builders have started construction on about 1.5 million new homes a year since 1959, to keep up with household formation which has run at an average of 1.27 million new homes a year, according to Census data analyzed by Moody’s MCO +0.92% Analytics.
U.S. households, many of which doubled up during the economic downturn in order to save money, have been growing by just over one million a year since 2008.
"My gut tells me it’s the demographics kicking in," said Patrick Newport, an economist with IHS Global Insight. "At some point, builders are going to have to ramp up at a very steep rate. That’s what’s kicking in here. Construction has just been depressed for too long."