Home Construction Jumps In August -- But It's Apartments That Are Driving Gains

11/21/2010 04:12 am ET | Updated May 25, 2011

WASHINGTON — The homebuilding industry is years away from recovering from the excesses of the housing boom.

Even with a modest rise in construction last month, the pace of building would need to at least double to signal a healthy market and contribute in a meaningful way to job growth, according to most economists. They don't see that happening until the middle of the decade.

Builders are competing with millions of foreclosures and other distressed properties that show no signs of abating. They are unlikely to ramp up construction until those are cleared away and demand for new homes picks up.

Home construction did rise 10.5 percent in August, to a seasonally adjusted annual rate of 598,000, the Commerce Department said Tuesday. The results, however, were boosted by a 32 percent jump in apartment and condominium construction, a volatile part of the market.

Construction of single-family homes, which represented about 73 percent of the market in August, grew only about 4 percent from a month earlier. While overall housing starts are up 25 percent from their bottom in April 2009, they are still 74 percent below their peak in January 2006.

"Homebuilding activity remains at an astoundingly weak level," said Paul Dales, U.S. economist with Capital Economics.

Most economists agree that construction has to be at least double current levels for the market to be considered healthy – between 1.2 million and 1.5 million each year. Dales doesn't see that happening for at least three to four years.

The industry is suffering the repercussions of a massive building boom that saw 2 million homes per year constructed from 2004 through 2006. Many of those homes were sold to speculators. They then resold the homes, often to borrowers who took out risky loans and then defaulted.

Those unsustainable boom times aren't coming back, economists say.

"We're not going to get back to that kind of unsupportable level of demand," said Brad Hunter, chief economist with Metrostudy, a real estate research and consulting firm. He forecasts the industry will break ground on 670,000 homes this year.

He doesn't expect the industry to hit the 1 million per year rate until 2012, and that's only if the economy does not slide back into a recession.

Normally the building industry powers economic recoveries. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

But housing has been at the center of this downturn and it shows no signs of recovering quickly. Economists at Bank of America-Merrill Lynch predict that spending on building and remodeling homes will decline in the July-September quarter and actually subtract 0.7 percentage points from overall economic activity.

The industry has improved from the lowest point during the recession. Single-family housing starts are up 11 percent from January 2009. But they remain 78 percent below their peak in January 2006 – before the housing market went bust.

Building permit applications, a sign of future activity, grew by nearly 2 percent to an annual rate of 569,000. Permits for single-family homes, however, fell by 1.2 percent to the lowest point since April 2009. Those permits have fallen for five consecutive months.

Lennar Corp., a major builder based in Miami, said Monday the number of buyers signing agreements to purchase its homes fell 15 percent from a year ago in the three months ended August 31.

"It's been a tough summer," said Stuart Miller, Lennar's chief executive, during a conference call with investors Monday. "As we've gone into September, we're seeing a little bit of pickup in our traffic, but that shouldn't be cause to have a sigh of relief at this point."

Construction activity rose 34 percent in the West and was up 22 percent in the Midwest and 7 percent in the South. However, construction fell by 24 percent in the Northeast.

On Monday, the National Association of Home Builders said its monthly index of builders' sentiment was unchanged in September at 13. The index has now been at the lowest level since March 2009 for two straight months.

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