Housing Starts: Up Is Better Than Down

A greater number of general contractors have been dusting off work boots and hitching up tool belts. Single-family home starts jumped 7.5% in May, the third consecutive monthly rise, indicating that new home construction might be at—or close to—a bottom.

Overall housing starts—including apartment construction—increased 17.2%, to a seasonally adjusted 532,000 annual rate from April, the U.S. Commerce Dept. reported on June 16. Building permits increased 4% for all homes and 7.9% for single family homes, a good sign for future construction activity. Apartment construction, which is highly volatile from month to month, surged 61.7% in May after dropping to an unusually low rate in April.

But remember that these increases are relative: Home production remains at historically low levels.

"The recent pickup is not something to get particularly excited about," said Zach Pandl, economist with Nomura Securities in New York. "If we continue at this growth rate, it will take a long time to get back to a [normal] trend-like level."

"just a little less awful"

The current annual rate of new home construction—at 532,000—is equal to little more than half of the million or so new U.S. households created each year, according to Pandl, but he cautions that the market still has one or two years of excess inventory to work off. New home sales dropped 75% from their peak in October 2005 to their January 2009 trough, said Michelle Meyer, U.S. economist with Barclays Capital. By comparison, existing home sales fell 38% since peaking in September 2005.

"These are incredibly low levels," said Mark Vitner, a senior economist for Wachovia. "It's a matter of being just a little less awful than it used to be."

But at least the numbers aren't shrinking.

Single-family home starts, while still well below last year's levels, accelerated in May. The April rate, by comparison, was up 3.3% from March. And new home inventory levels have fallen significantly because of a combination of slowing production and stabilizing sales.

first-time buyer tax credits help

National Association of Home Builders chief economist David Crowe said construction levels are likely to bounce around on the bottom for several months and might even dip into negative territory before production begins rising steadily. Builders have to compete with a large supply of deeply discounted bank-owned foreclosures.

Crowe attributed the May single-family home permit and construction increase to builders trying to get new homes to market before the federal government's $8,000 first-time buyer tax credit expires in December.

Builders will "have to have that house done or sold by Dec. 1 for a buyer to qualify" for the credit, Crowe said. "Typically construction of a home takes four to five months."

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