Builders broke ground in December on the most single-family homes in almost seven years, propelling an unexpectedly large gain in U.S. housing starts that signals construction will contribute more to economic growth in 2015.
Work began on 728,000 houses at an annual rate, a 7.2 percent increase from November and the most since March 2008, a Commerce Department report showed Wednesday in Washington. Total housing starts, which include apartments, climbed 4.4 percent to a 1.09 million pace.
The improvement in single-family construction at year-end signals the industry is beginning to focus on the biggest part of the market, perhaps encouraged by gains in employment and consumer confidence that make Americans more likely to marry and have children. Historically low borrowing costs and more access to credit would raise the odds that a household will decide to buy a property rather than rent.
“The strength is where you’d like to see it, in single-family housing,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who had forecast starts would rise to 1.07 million. “It bodes well for residential real estate. It’s another thing going in the right direction for the economy.”
Stocks rose for a third day as energy shares rallied and speculation grew that the European Central Bank will provide more stimulus. The S&P 500 climbed 0.5 percent to 2,032.12 at the close in New York. The S&P Supercomposite Homebuilding Index advanced 1.4 percent.
The median forecast of 82 economists surveyed by Bloomberg projected total housing starts would rise to a 1.04 million pace in December. Estimates ranged from 950,000 to 1.1 million. The November reading was revised up to a 1.04 million rate from a previously reported 1.03 million.
Permits, a proxy for future construction, declined 1.9 percent in December to a 1.03 million pace. They were depressed by a setback in multifamily projects, which can be volatile from month to month. Applications for single-family homes increased to a seven-year high.
Builders began work on 1.01 million homes in 2014, the most since 2007. The construction boom peaked at a three-decade high of 2.07 million in 2005, before plunging to a record-low 554,000 in 2009.
The rebound in residential real-estate since the recession has been mainly driven by gains in multifamily projects, including apartment buildings, as Americans soured on homeownership and opted to rent instead. A more solid recovery in construction of single-family homes would signal the industry is on sounder footing.
Single-family houses accounted for 64 percent of all housing starts in 2014, the least since 1985.
“Looking out to 2015, we think that a stronger labor market may support a pickup in household formation, which in turn may underpin further gains in housing construction,” John Ryding, chief economist at RDQ Economics in New York, said in a research note. “We also think that with housing still relatively affordable and with households increasingly employed and feeling that economic conditions are more normal, that single-family housing will carry more of the gains in housing construction in 2015.”
Sentiment in the industry is hovering close to a nine-year high. While the National Association of Home Builders/Wells Fargo builder sentiment gauge fell to 57 in January from 58 the prior month, readings greater than 50 mean more respondents report market conditions are good, according to figures from the Washington-based group on Tuesday.
An improving labor market will help lift home sales and underpin building activity. About 3 million more Americans found work in 2014, the most in 15 years, Labor Department figures showed. Payrolls climbed by 252,000 workers in December after a 353,000 gain the previous month, and the jobless rate fell to 5.6 percent, the lowest level since 2008.
Advancing confidence also will help. The University of Michigan preliminary consumer sentiment index rose this month to the highest level since January 2004.
Borrowing costs have retreated in the past month. The average 30-year, fixed-rate mortgage was 3.66 percent in the week ended Jan. 15, the lowest since May 2013, according to data from Freddie Mac in McLean, Virginia.
The outlook for economic growth is encouraging companies such as Wells Fargo & Co., the largest U.S. home lender.
“There have been many signs of strength in the U.S. economy,” Chief Executive Officer John Stumpf said on a Jan. 14 earnings call. “I don’t think this is a breakout, but I think we’re on our front foot.”
Residential investment made a small contribution to economic growth in the second and third quarters of 2014 after being a drag in the first three months.
(A previous version of this story was corrected to insert ‘million’ in second paragraph.)