Builders broke ground on more homes in November than at any time in over five years as growing demand helped the industry overcome rising U.S. mortgage rates.
Housing starts jumped 22.7 percent to a 1.09 million annualized rate, exceeding all forecasts of economists surveyed by Bloomberg and the most since February 2008, data from the Commerce Department showed today in Washington. Permits for future projects held near a five-year high, indicating the pickup will be sustained into 2014.
Gains in construction will probably boost economic growth this quarter as an improving job market propels homebuilding to its best year since 2007. Federal Reserve officials today took the first step toward unwinding unprecedented monetary stimulus, saying they will reduce monthly bond purchases to $75 billion from $85 billion as employment and the expansion showed signs of progress.
“The economy seems to be picking up and there’s quite a lot of pent-up demand,” said David Sloan, a senior economist at 4Cast Inc. in New York and the top forecaster for housing starts over the past two years, according to data compiled by Bloomberg. “Even if the Fed does start to taper, I think the housing market will prove resilient.”
Stocks rose, sending benchmark indexes to all-time highs, after the Fed’s decision. The Standard & Poor’s 500 Index climbed 1.7 percent to 1,810.65 at the close in New York. The S&P Supercomposite Homebuilding Index increased 4.2 percent.
The economic news in the U.K. today was also good as the country’s unemployment rate unexpectedly dropped to 7.4 percent in the three months through October, the lowest in more than four years, from 7.6 percent in the quarter through September.
The median estimate of 72 economists surveyed by Bloomberg projected U.S. housing starts would rise to a 955,000 annualized rate. Estimates ranged from 868,000 to 1.04 million. November saw the biggest one-month jump since January 1990.
Starts are on track to reach 930,500 this year, the most since 2007’s 1.36 million, according to Bloomberg calculations.
Today’s data offered the first look at housing starts since August readings after a government shutdown in October delayed reports.
November building permits fell 3.1 percent from the prior month to a 1.01 million rate, exceeding the projected 990,000 annual pace that was the median estimate in the Bloomberg survey. October’s 1.04 million were the highest since June 2008.
Starts of single-family houses climbed 20.8 percent to a 727,000 rate in November, the most since March 2008, from 602,000 the prior month. Last month’s jump was the biggest since February 1991. Work on multifamily projects such as condominiums and apartment buildings increased 26.8 percent to an annual rate of 364,000, the most since March.
Three of four regions showed an increase in ground-breaking last month, led by a 41.7 percent surge in the Midwest and a 38.5 percent jump in the South that was the biggest since July 1982. Starts climbed 8.8 percent in the West and fell 29.4 percent in the Northeast.
As the industry heads into the traditionally slower months of winter, when colder temperatures hold back activity, huge swings could overstate the strength of the market, said Michael Gapen, a senior U.S. economist in New York for Barclays Plc.
“We would suggest some caution in interpreting the strength of the November data,” Gapen said in a research note. If the previous increase in mortgage rates held back activity in September and October and instead pushed it into November, when the seasonal slowdown typically starts, then the government’s adjustment process would tend to make last month look stronger than it actually was, he said.
Still, if you look at the average over the past three months, then housing starts “provide further evidence that the recovery in U.S, housing should prove resilient to the rise in mortgage rates observed in recent months,” Gapen said.
An improving labor market and rising real estate values have helped make homebuilders upbeat about the industry’s prospects. Builder sentiment climbed in December to match the highest level in eight years. The National Association of Home Builders/Wells Fargo gauge rose to 58 from 54 the previous month, the Washington-based group reported yesterday. An index above 50 means more respondents report good market conditions.
Fed policy makers said today at the conclusion of their two-day meeting that they will reduce monthly purchases of Treasuries to $40 billion from $45 billion and trim mortgage-backed securities purchases to $35 billion from $40 billion.
“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the committee decided to modestly reduce the pace of its asset purchases,” the Federal Open Market Committee said in a statement.
Borrowing costs for homebuyers have climbed since the central bank signaled earlier this year that it was preparing to reduce asset purchases. The average 30-year fixed-rate mortgage was 4.42 percent for the week ended Dec. 12, compared with 3.32 percent a year ago, according to Freddie Mac in McLean, Virginia.
Luxury-home builder Toll Brothers Inc. is among those projecting any lull in the market will be short-lived.
“We believe this leveling of demand will prove temporary based on still-significant pent-up demand, the gradual strengthening of the economy and the improving prospects of our affluent customers,” Douglas Yearley Jr., Toll’s chief executive officer, said in a Dec. 10 statement.
The Horsham, Pennsylvania-based company’s fourth-quarter revenue was $1.04 billion, up from $632.8 million a year earlier. The average price of homes sold was $703,000, up from $651,000 in the previous three months. Signed contracts rose 6 percent to 1,163 homes, compared with 70 percent growth a year earlier.
Nonetheless, mortgage costs remain historically low and payroll gains make prospective buyers more confident. The Harvard Joint Center for Housing estimates that the U.S. requires between 1.6 million to 1.9 million starts just to accommodate population growth and new households.
“Housing has started to recover, but we are still very much in the early stages,” said Patty Bedient, executive vice president and chief financial officer at lumber supplier Weyerhaeuser Co. in Federal Way, Washington.
“While the exact shape of the recovery is difficult to predict, there’s really no disagreement that the overall direction is up,” Bedient said on a Dec. 17 conference call with investors. “We believe housing will be very positive going forward.”