Home Construction Increases as Housing Market Starts to Bounce Back
The aftermath of the housing bust forced many homebuilders to dramatically scale back construction on new homes to avoid the risk of ending up saddled with a trove of newly built, yet unsold properties.
But an improving housing market has homebuilders feeling more confident about sales, and that's likely to kick the pace of new construction into a higher gear this year.
The Commerce Department recently said that builders broke ground on houses and apartments last month at a seasonally adjusted annual rate of 954,000. That's 12.1 percent higher than November's annual rate. And it is nearly double the recession low reached in April 2009.
Construction increased last month for both single-family homes and apartments. And the pace in which builders requested permits to start more homes ticked up to a 4½ year high.
For the year, builders started work on 780,000 homes. That's still roughly half of the annual number of starts consistent with healthier markets. But it is an increase of 28.1 percent from 2011. And it is the most since 2008 - shortly after the housing market began to collapse in late 2006 and 2007.
Steady hiring, record-low mortgage rates and a tight supply of new and previously occupied homes available for sale have helped boost sales and prices in most markets. That has persuaded builders to start more homes, which adds to economic growth and hiring.
David Williams, a homebuilding analyst with Williams Financial Group, says builders are very closely tied to what's happening in the housing market and they're going to build homes to meet demand, but not go overboard.
"I don't think, at this point, that they're going to overbuild," Williams said, noting that homebuilders are still holding back on building too many spec homes, or properties built before they're sold.
Having some spec homes can help sales, especially when a buyer isn't willing to wait several months for their home to be built. Builders tend to put up more of those homes heading into the spring home-selling season that traditionally begins next month.
Larry Webb, CEO of homebuilder The New Home Co., in Aliso Viejo, Calif., says he is building homes at a faster pace than a year ago, but he sticks to a sell-first, build-second approach.
Overall, Webb is selling and building a minimum of four homes a month, at least double the pace of sales and construction two years ago.
Webb believes the stepped-up pace of home construction will continue this year. But he's holding on to the sell-first approach.
"Based on what we've gone through in the last recession and the way we do business, we think we should primarily build after we sell homes," he said. "We only build after we sell."
The company, which builds homes in California, has 10 open communities and plans to open another 14 this year.
"Normally there's a big drop off between Thanksgiving and Christmas," Webb said. "We saw very solid traffic and we're anticipating a very good first quarter."
Thursday's positive housing report, along with a steep decline in unemployment benefit applications, contributed to a strong day on Wall Street. The Standard & Poor's 500 closed at a five-year high.
"There is no denying that the housing market recovery is solidifying, and we expect construction activity to ramp up to the 1 million annualized threshold by the end of this year," said Michael Dolega, an economist with TD Economics, in a note to clients.
Dolega said the gains in home building helped boost construction hiring in December by 30,000 jobs - the most in 15 months. He predicts the construction industry could add half a million jobs in 2013.
In December, the pace of single-family home construction, which makes up two-thirds of the market, increased 8 percent. While that's well below healthy levels, single-family housing starts are now 75 percent higher than the recession low reached in March 2009.
Apartment construction, which is more volatile, surged 23 percent last month. It is now back to pre-recession levels.
Applications for building permits, a sign of future construction, inched up to a rate of 903,000 - the highest level since July 2008.
"The strong rise in single-family starts is a clear indication of builder confidence in the sales outlook," said Pierre Ellis, an economist at Decision Economics, in a note to clients.
Confidence among homebuilders held steady in January at the highest level in nearly seven years. But builders are feeling slightly less optimistic about their prospects for sales over the next six months, according to a survey released Wednesday.
In November, sales of previously occupied homes rose to their highest level in three years, while new-home sales reached a 2 1/2-year high.
Those factors have helped make homebuilders more confident and spurred new home construction. But homebuilders' are still warily watching the current standoff in Washington between President Barack Obama and Congress over several approaching budget deadlines, including the need to boost the nation's $16.4 trillion borrowing limit.
Though new homes represent less than 20 percent of the housing sales market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the homebuilders association.