WASHINGTON (MarketWatch) — The housing market showed little evidence of retreat in August despite a slower U.S. economy as construction on new homes rose by 2.3%.
The real-estate market is one of the few sectors of the economy to remain in an expansive mode, benefiting from ultra-low interest rates and pent-up demand. Housing starts climbed to an annual rate of 750,000 last month, just a whisker off a four-year high, the Commerce Department said Wednesday.
Construction on new homes is 29% higher than one year ago
The sector did show signs of flattening out, however. Permits for new construction, viewed as a gauge of future demand, fell slightly to an annual rate of 803,000 from a revised 811,000 in July. The number of permits issued in July was the highest in four years.
Yet permits for single-family homes, which usually account for three-quarters of the housing market, edged up to an annual pace of 512,000 last month — the highest rate since March 2010.
The increasing rate of construction has been a boon for the stocks of home builders such as PulteGroupPHM +4.95% , Meritage Homes MTH +2.22% , M/I HomesMHO +2.45% MHO +2.45% , KB Home KBH +3.15% and D.R. Horton DHI +3.81% . All of these stocks, which rose in Wednesday trades, have doubled or tripled in price over the past year.
What’s more, the Federal Reserve’s decision last week to buy $40 billion in mortgage-related securities each month until the economy improves suggests better days ahead. The central bank’s action could push historically low mortgage rates even lower and stimulate more demand.
Home builders certainly have more pep in their step. Earlier this week, a survey that measures the confidence of builders surged to its highest level in six years. The survey, produced by the National Association of Home Builders, has risen five straight months.
Economists believe the housing market will continue to expand barring a U.S. downturn, boosted by low rates.
Many people who put off home purchases following the 2007-2009 recession may also be ready to dip their toes into the market. Builders say foot traffic through new units for sale is the highest since the recession.
Still, the housing market is far from fully healed. In a normal economy, sales would be at least double or even triple the current pace. A high unemployment rate — 8.1% as of August — and tight lending standards by banks are among the obstacles to faster sales.
“Another step forward on a very long staircase,” said John Tashjian, a principal at Centurion Real Estate Partners in New York City. “The U.S. homebuyer is still wary of housing as an investment and it will take time to heal the psychic scars of the past four years.”
Indeed, the home-builder survey is still below the key 50 mark — the level at which conditions are viewed more positively than negatively. The index ticked up 3 percentage points to 40, but it hasn’t topped 50 since mid-2006.
Cautious buyers can also find better deals among previously owned homes, some of which are going for below-market rates so sellers can make a quick sale.
On Wednesday, the National Association of Realtors reported that sales of existing homes rose 7.8% to an annual rate of 4.82 million in August. That exceeded Wall Street’s expectations for an increase to 4.6 million.
New construction of single-family homes, meanwhile, jumped 5.5% to an annual rate of 535,000 in August, the Commerce Department said. Construction of single-family homes is about 27% higher compared to year ago.
Construction on multi-dwelling units, such as condominiums and townhouses, fell to an annual rate of 208,000 from 214,000 in the prior month. Permits for projects with five units or more fell 3.0% to 263,000 in August.
New construction rose 20.7% in the Midwest and 3.7% in the South, but fell 4.3% in the West and 12.6% in the Northeast.
The effects of a healthy housing industry are widespread. Huge amounts of raw materials and finished goods are required to build homes and furnish them after sale and the construction trade employs millions of workers directly or indirectly.
Yet the housing market doesn’t play as big a role in the economy as it used to. Jim O’Sullivan, chief U.S. economist at High Frequency Economics, says new construction accounts for about 2.5% of the economy now compared to a peak of 6.3% in 2005.
Jeffry Bartash is a reporter for MarketWatch in Washington.