The beginning home construction in the U.S has surged 15 percent in September to an average annual pace of 872,000 units. The figure is highest since July 2008, and has beaten all the estimates. Building permits also rose to an 894,000 annual rate, compared to analysts’ estimate of 810,000.
Population growth, dwindling supply and record-low mortgage rates have boosted sales. Builders like Meritage Homes Corporation (NYSE:MTH) and Lennar Corporation (NYSE:LEN) expect the housing market to strengthen and contribute to the economic growth. Additionally, a jump in housing starts has surprised everyone as the unemployment rates declined from 8.1 percent to 7.8 percent in September. Thus, housing demand will revive the job market as well. Almost 2 million construction workers have gone unemployed since the end of 2007.
“This is good news for the labor market,” said Anika Khan, a senior economist at Wells Fargo & Company (NYSE:WFC) If single-family starts “continue to show this positive momentum, and we expect they will, we’ll likely start to see some construction jobs come back.”
Shares of homebuilders have rallied after the report. The S&P’s Homebuilding Index is up 4.9 percent to 455.58. The stocks of Lennar Corporation (NYSE:LEN) have gained 165 percent in the last 12 months. D.R. Horton is up 129 percent and PulteGroup has risen 337 percent in the same period (no, that’s not a typo).
On September 24, Miami-based Lennar said its quarterly profits have more than quadrupled amid rising demand for new houses. Its third quarter revenues jumped from $820.2 million to $1.1 billion a year earlier. Contract backlogs have increased 79 percent and new orders have jumped 44 percent to 4,198 homes.
Construction of single-family homes is up 11 percent from August to 603,000. The start of multi-family homes such as apartment buildings have risen 25.1 percent to 269,000. Demand for apartments across the nation is highest in decades due to stiff lending standards and foreclosures.
The last four years have been worst for the housing market since 1959. In 2005, housing starts touched a pre-recession peak of 2.1 million before plunging to 554,000 in 2009.
The jump in the housing starts is the latest sign that the U.S. economy is gaining strength, after reporting a rather slow 1.3 percent annual growth in the third quarter.
About 70% of single-family housing starts are built for sale (the rest are built on custom order or are built by the homeowner), so the 603,000 pace of starts in September is consistent with about 425,000 units in the for sale market. New single family home sales ran at 373,000 in August. Moran Stanley expects a rise to 395,000 in September, but the latest level of starts would be consistent with inventories of unsold homes starting to rebuild from current record lows.
That can certainly be sustained for a while with months’ supply of unsold single-family homes at 4.5 months in August, well below a more balanced 6 months in normal market conditions. Without a stronger recovery in home sales, however, which will be difficult with mortgage lending conditions as tight as they are, prospects for a large near-term extension of this latest jump in single-family starts are limited. Note also that single-family housing permits at 545,000 were significantly below the level of starts in September, which often flags a pullback in starts in the next month.