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Gains in Permits Signal Sustained U.S. Housing Rebound

Photographer: Daniel Acker/Bloomberg

A contractor levels pea gravel in the basement of a home being built in East Peoria, Illinois. Close

A contractor levels pea gravel in the basement of a home being built in East Peoria, Illinois.

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Photographer: Daniel Acker/Bloomberg

A contractor levels pea gravel in the basement of a home being built in East Peoria, Illinois.

Builders began work on more houses in February and permits for future construction climbed to the highest level in almost five years, pointing to a sustained rebound that will help power the U.S. expansion.

Housing starts climbed by 0.8 percent last month to a 917,000 annualized pace, the Commerce Department reported today in Washington. Permits (NHSPATOT) rose 4.6 percent to a 946,000 rate, the most since June 2008.

Advances in residential construction will probably give an even bigger boost to growth this year than in 2012, when it contributed for the first time in seven years. The gains are rippling through the economy as improving property values help restore consumer confidence and benefit builders such as Ryland Group Inc. (RYL) and home-improvement retailers, offsetting some of the damage from government cutbacks.

“We’re optimistic about the housing recovery,” said Anika Khan, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, a subsidiary of the largest U.S. mortgage lender and the second-best housing starts forecaster over the past two years, according to data compiled by Bloomberg. “We’ll continue to see construction pick up. Housing continues to be a bright spot for the economy.”

Most stocks fell for a third day, the longest slump of the year for the Standard & Poor’s 500 Index, as Cyprus rejected a bank-deposit levy needed to secure European bailout funds. The benchmark gauge declined 0.2 percent to 1,548.34 at the close in New York. The S&P Supercomposite Homebuilding Index (S15HOME), whose 11 members include Ryland, D.R. Horton Inc. and Lennar Corp. (LEN), advanced 0.7 percent.

U.K. Inflation

Elsewhere today, data showed inflation in the U.K. accelerated in February to the fastest pace in nine months, and foreign direct investment in China rose for the first time since May.

The median estimate of 81 economists surveyed by Bloomberg projected U.S. housing starts would rise to a 915,000 pace. Forecasts ranged from 872,000 to 1 million. The prior month’s figure was revised to a 910,000 rate from a previously reported 890,000.

Building permits increased last month from a 904,000 annual rate in January and compared with a 925,000 median forecast. A higher ratio of permits to starts signals home construction will pick up.

Related story: Strategies for the Spring Housing Scrum

“As long as that is outpacing starts, we’ll likely see another positive month next month,” said Khan. “Housing will continue to add” to growth, she said.

GDP Effect

Residential construction, which includes home improvements, climbed 12.1 percent in 2012 from the prior year, contributing 0.27 percent to the 2.2 percent advance in gross domestic product. Economists at Morgan Stanley in New York estimate it will advance 14 percent this year.

“We see a lot of positive signs out there,” Larry T. Nicholson, president and chief executive officer at Ryland, a West Lake Village, California-based homebuilder, said at a March 5 conference. “All the numbers were positives going into the year, and again, we have a favorable outlook for the year.”

Yesterday, a report showed builder sentiment took a step back in March. The National Association of Home Builders/Wells Fargo confidence index dropped 2 points to 44, reflecting concerns about strict lending rules and supply bottlenecks as the industry rebound pushes up raw-material costs. Readings below 50 mean more respondents said conditions were poor.

Customer Traffic

The group’s gauges of the sales outlook and customer traffic improved, according to the report, while an index of present single-family home sales fell to a five-month low.

Construction of one-family properties climbed 0.5 percent to a 618,000 rate, the highest since June 2008, from 615,000 the prior month, today’s report showed. Work on multifamily residences such as apartment buildings rose 1.4 percent to an annual rate of 299,000.

Two of four regions showed gains in February starts, led by a 37.5 percent jump in the Midwest. New construction rose 18.4 percent in the Northeast. Starts decreased 7.2 percent in the West and 5.7 percent in the South. The drop in the South reflected fewer starts of multifamily units.

Construction companies began work on 780,600 homes in 2012, a 28.2 percent increase from 2011 and the third straight annual gain. Even with the yearly improvement, housing starts remain short of the 2.07 million in 2005, a three-decade high reached at the peak of the boom.

Federal Reserve

As builders enter the spring selling season, the Federal Reserve may be set to extend its record monetary policy stimulus that has helped keep mortgage costs low and allowed for a rebound in housing, the industry that was at the center of the financial crisis.

Fed officials, who began their two-day meeting today, have said they will keep their benchmark lending rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. They also said during a January meeting they would keep buying $40 billion per month in mortgage bonds and $45 billion in Treasuries.

Housing is “a sector with huge upside potential for GDP and job creation,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “The upside from housing is probably the only thing that’s going to provide tailwinds strong enough to realize the substantial improvement to the labor market that the Fed is hoping for.”

For those who qualify for home loans, cheaper borrowing costs are attracting buyers. The average rate on a 30-year, fixed-rate purchase loan was 3.63 percent last week, compared with 3.92 percent a year ago, according to McLean, Virginia- based Freddie Mac. The 30-year rate reached a record-low 3.31 percent in November.

Home Improvement

Residential construction gains filter to other parts of the economy as well, from appliance makers such as Whirlpool Corp (WHR). to retailers such as Lowe’s Cos. (LOW) and Home Depot Inc. (HD)

Spending on remodeling in the 12 months through Sept. 30 may climb 20 percent from a year earlier to $145.5 billion, according to a forecast by Harvard University’s Joint Center for Housing Studies.

Mooresville, North Carolina-based Lowe’s is hiring 9,000 permanent part-time workers this year as it sells more appliances and bathroom fixtures. Lowe’s and Atlanta-based Home Depot have improved online services allowing owners to design projects and communicate with employees as work progresses.

Homeowners are giving themselves “the psychological permission to spend it and feel good about it,” Robert Niblock, chief executive officer at Lowe’s, said on a conference call March 13.

To contact the reporters on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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