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Builders Race to Keep Up With Surging U.S. Home Demand

Photographer: Andrew Harrer/Bloomberg

A contractor tosses bricks onto scaffolding at a home under construction in Glenelg, Maryland. Close

A contractor tosses bricks onto scaffolding at a home under construction in Glenelg, Maryland.

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Photographer: Andrew Harrer/Bloomberg

A contractor tosses bricks onto scaffolding at a home under construction in Glenelg, Maryland.

Joe Chamberlain says he can’t build homes fast enough to keep up with demand. The founder of Caprock Custom Construction Inc. in Rockwall, Texas, has yet to break ground on any of the three houses he sold in May and June.

That’s “an excellent position for a builder to be in,” said Chamberlain, who already has three homes under construction and is just starting work on another. “It ensures we’ll stay busy for a long time and make a profit.”

Almost 36 percent of all U.S. new homes sold in May weren’t yet under construction, close to a seven-year high and signaling sustained strength in homebuilding as companies try to catch up. That in turn will trigger purchases of everything from cement and lumber to furniture and appliances, bolstering hiring and economic growth, economist Neil Dutta predicts.

“There’s clearly more housing starts activity in the pipeline,” said Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “The economic outlook is getting better and there’s more household formation. With demand rising, production is going to follow.”

Of the 45,000 new houses sold in May, construction hadn’t yet begun for 16,000, according to Commerce Department data. The share of yet-to-be-built dwellings was up from 26 percent a year ago and from a recession low of 14 percent in September 2008.

Photographer: David Paul Morris/Bloomberg

Contractors work on homes under construction in San Ramon, California. Close

Contractors work on homes under construction in San Ramon, California.

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Photographer: David Paul Morris/Bloomberg

Contractors work on homes under construction in San Ramon, California.

The outlook for housing has helped drive the Standard & Poor’s Homebuilding Index up 29 percent in the past year, outpacing the S&P 500 Index’s 18 percent gain. The S&P 500 fell 0.1 percent today to close at 1614.08 in New York.

Factory Orders

Orders (TMNOCHNG) placed with U.S. factories rose 2.1 percent in May, reflecting broad-based gains that signal manufacturing is stabilizing, Commerce Department figures showed today. The Reserve Bank of Australia, which has cut its benchmark rate by 2 percentage points since November 2011, left borrowing costs unchanged today at a record-low 2.75 percent. Governor Glenn Stevens said in a statement accompanying the decision that “the economy has been growing a bit below trend over the recent period.”

In the U.S. since 2008, residential construction has averaged fewer than 700,000 single- and multi-family units per year, of which about 300,000 a year were to replace obsolescent dwellings, according to Stuart Miller, chief executive officer of Miami-based Lennar Corp (LEN). Even a jump to about 950,000 new dwellings in 2013, “a significantly stronger year of building activity,” would still be below the nation’s need of 1.2 million to 1.5 million a year, he said.

Building Shortfall

“The overriding driver of recovery in the housing market remains the underproduction of both single and multifamily product throughout the economic downturn and up to and including this year,” Miller, head of the third-biggest U.S. homebuilder by revenue, said on a June 25 earnings call. “This shortfall will have to be made up.”

The demand-supply gap means housing will keep adding to the four-year economic expansion. Over time, residential investment’s contribution to gross domestic product growth may expand to as much as 0.6 percentage point, Renaissance Macro’s Dutta said. Housing contributed an average of 0.1 point in the four years since the recession ended in June 2009, while GDP growth averaged about 2 percent.

The recovery also will be able to withstand the recent run-up in borrowing costs as credit conditions are easing, in part because rising prices make homes a more attractive asset for banks to lend against, he said.

Americans are betting it’s a good time to buy because property prices and interest rates may climb further. The proportion of consumers who consider home-selling conditions favorable is the highest since 2006, while the share saying it’s a bad time to purchase a house is the smallest in 10 years, Thomson Reuters/University of Michigan figures on consumer confidence showed in June.

California, Colorado

“Buyer traffic and sales are tremendous” in California, and “unbelievable” in Colorado, said Doug Bauer, chief executive officer of TRI Pointe Homes Inc. (TPH) The Irvine, California-based company, which became publicly held in January and is partly owned by investor Barry Sternlicht, announced in June that it bought 202 lots to add communities of entry-level and move-up residences in California’s Orange and Solano counties.

“The rise in rates really hasn’t softened demand at all,” Bauer said in an interview. “In fact, it’s pushed more people into the sales office because they want to lock in” current borrowing costs.

Mortgage Rates

A 3.75 percent mortgage rate was an incentive when Josh Robertson decided to buy a five-bedroom house in the Atlanta suburb of Sandy Springs, Georgia, in June. The 37-year-old life insurance salesman wanted a larger home and the loan terms on this one seemed a bargain compared with the 8 percent rate he paid for his first purchase in 2000, or a rate “in the 6’s” when he moved to another home in 2003.

“We had good fortune that low mortgage rates gave us buying power,” and the rate was still “reasonably close” to the low, Robertson said.

Increasing demand will keep boosting property prices as inventory remains near an eight-year low. At the current sales rate, the supply of new single-family homes in May would last 4.1 months, down from 4.7 months a year earlier.

Total new home sales in May jumped to the fastest annualized pace since 2008. Permits to build one-family homes also rose to a five-year high, outpacing the rate of starts, which reflect when builders break ground.

Builders Frustrated

Still, builders are frustrated by obstacles including limited access to capital, said David Crowe, chief economist at the National Association of Home Builders in Washington. Land, labor, and materials also are in short supply, reflecting difficulties in recouping capacity that was slashed during the recession.

“The constraints will gradually work themselves out,” he said.

Starts on single-family homes will rise about 25 percent this year, about the same as in 2012, Crowe estimates. That means builders will break ground on 150,000 more houses this year than they did in 2012. Given that each new house built creates three jobs, this year’s projected gain would generate 450,000 additional positions in housing and the rest of the economy, he said.

Land Grab

Signs that the rebound is here to stay encouraged MBK Homes in June to purchase four parcels of land to expand in southern California, its first real estate acquisition since 2008.

“Unquestionably, things are picking up compared to even six months ago, and certainly compared with a year ago,” said Tim Kane, president of MBK, which is financed by the U.S. real-estate development unit of Tokyo-based Mitsui & Co. Ltd. “All price ranges are seeing demand. For the next few years, it’s going to be a lot of building activity.”

More buyers are returning to the new-home market as large pools of investors buying existing homes have depleted already-low supplies of houses, said Jay Moss, chief marketing officer of Woodside Homes in Salt Lake City, Utah.

California, Arizona and Nevada are “extremely hot” markets, he said. In many cases, “we have sold most of the homes before we’ve started,” Moss said. Woodside expanded staff in the past year, and “now that we’re getting busier, we need more people.”

The company will deliver all 59 houses in its Bella Brisas development in Rancho Cordova near Sacramento, California, instead of the 48 originally scheduled for this year, Moss said.

“We have ramped up production,” he said. “We didn’t think sales would be so strong.”

Back in Texas, Chamberlain is talking with several prospective buyers and he says he’ll have enough work for the next year or two as he finishes up some of the contracts in hand and breaks ground on others.

“There is more demand than houses to go around” in the Rockwall market, especially in the $250,000 plus-range, said Chamberlain, who is also president of the Dallas Builders Association. Developers of multifamily units are “also swamped. Across the entire spectrum, it’s just busy, busy for everyone.”

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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