Homebuilding Gain Points to Sustained U.S. Growth: Economy

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Housing Starts
Roofers work on a house under construction in Louisville, Kentucky. Photographer: Luke Sharrett/Bloomberg

Builders started work on more homes in September and American consumers this month were the most optimistic in seven years, signaling the U.S. economy will ride out a global slowdown.

Housing starts climbed 6.3 percent to a 1.02 million annualized rate from a 957,000 pace in August as multifamily and single-family projects advanced, the Commerce Department reported today in Washington. The Thomson Reuters/University of Michigan preliminary sentiment index for October increased to 86.4, the strongest since July 2007, another report showed.

Gains in residential construction will help underpin the economic expansion as the recent drop in mortgage rates lifts home sales and gives builders reason to take on more projects. Other figures showing factory production rebounded last month and claims for jobless benefits dropped last week to the lowest level in 14 years added to evidence the turbulence in global markets has yet to depress the world’s largest economy.

“The fundamentals continue to look solid,” said Gus Faucher, an economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly projected an increase in homebuilding. “The turmoil in the market doesn’t reflect the underlying U.S. economic fundamentals.”

Stocks rallied, trimming this week’s decline, as earnings beat estimates and investors speculated that central banks will support economic growth with more stimulus. The Standard & Poor’s 500 Index rose 1.3 percent to 1,886.76 at the close in New York.

Survey Results

The increase in starts was in line with the median forecast of 76 economists surveyed by Bloomberg, which projected a gain to 1 million. Estimates ranged from 955,000 to 1.1 million after a previously reported 956,000 rate in August.

The firming in consumer confidence reflected a jump in Americans’ expectations about the economy six months from now as that gauge rose to 78.4 in October, a two-year high, the report from the University of Michigan showed. The index of current conditions, which measures Americans’ views of their personal finances, was unchanged at 98.9.

Job gains on pace for their strongest year since 1999 and cheaper gas prices are keeping households upbeat about the economic expansion amid the weakening in Europe and emerging nations. Faster wage increases and more broad-based improvement in the labor market would help further spur the consumer spending that makes up about 70 percent of the economy.

“An improving job market and lower energy costs are going to offset a lot of what’s happening,” said Joseph LaVorgna, chief U.S. economist of Deutsche Bank Securities Inc. in New York, who projected the index would rise to 86. “Consumers’ take-home pay is going up and they’re paying a lot less at the pump.”

Fuel Costs

The average price of a gallon of regular gasoline was $3.14 yesterday, the cheapest since February 2011, according to figures to AAA, the biggest U.S. auto group.

Falling energy costs help explain why Americans were more sanguine about price pressures. Consumers expected inflation to climb 2.8 percent over the next year, their lowest forecast in four years, today’s report showed.

Federal Reserve Bank of St. Louis President James Bullard said yesterday the central bank should consider delaying plans to end its bond-buying at the end of this month to halt a decline in expected inflation.

Today’s homebuilding report showed permits for future projects also increased, rising 1.5 percent to a 1.02 million annualized pace and pointing to a sustained pace of construction.

Construction Breakdown

Building of multifamily projects such as condominiums and townhomes jumped 16.7 percent to an annual rate of 371,000. Work on single-family properties rose 1.1 percent to a 646,000 rate in September from 639,000 the prior month.

All four regions of the U.S. showed increases, led by a 13.9 percent jump in the West.

Today’s figures followed a report yesterday from the National Association of Home Builders/Wells Fargo that showed builder confidence waned a bit in October after reaching its highest level in nine years the previous month.

Cheap borrowing costs will probably help underpin the market. The average 30-year, fixed-rate mortgage fell to 3.97 percent last week, the lowest since June 2013, according to Freddie Mac data. In November 2012, the rate fell to 3.31 percent, the lowest in figures back to 1971.

Mortgage Rates

“The trend in starts continues to be up,” said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio. “As the job market’s gotten better, as the mortgage rates have remained low and in the last week gone even lower, the underlying demand for single-family homes has improved.”

After adding to gross domestic product through much of 2013, residential construction has been uneven this year. Homebuilding contributed 0.27 percentage point to the 4.6 percent annualized gain in the economy in the second quarter. It subtracted from GDP in the previous six months.

Some lenders, including San Francisco-based Wells Fargo & Co., have tempered their outlook for an industry that hasn’t completely healed from the downturn that brought on the last recession.

“While the residential real estate market has definitely gotten better, which is good for the U.S. economy, it has not fully recovered,” Chief Executive Officer John Stumpf said on an Oct. 14 earnings call. “I believe there are several factors holding the housing market back from a complete recovery,” including slow household formation, elevated student debt levels and still-tight credit, he said.

Some of the ingredients for a pickup in the housing market remain in place. The economy has added an average 227,000 jobs per month through September. The unemployment rate has fallen to 5.9 percent from 6.7 percent at the end of last year.

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