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Published: Tuesday, 9/20/2011 - Updated: 2 years ago

Construction is less than half level economists say is needed for healthy economy

BY DEREK KRAVITZ
AP REAL ESTATE WRITER
Carpenters work on the frame of a new home under construction in Las Vegas. Carpenters work on the frame of a new home under construction in Las Vegas.
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WASHINGTON — Builders broke ground on fewer homes in August, evidence that the housing market remains depressed.

The Commerce Department said Tuesday that builders began work on a seasonally adjusted 571,000 homes last month, a 5 percent decline from July and a three-month low. That's less than half the 1.2 million that economists say is consistent with healthy housing markets.

Single-family homes, which represent roughly two-thirds of home construction, fell 1.4 percent. Apartment building plunged 12.4 percent.

Hurricane Irene slowed construction in the Northeast, analysts said.

Building permits, a gauge of future construction, rose 3.2 percent. Jennifer Lee, senior economist at BMO Capital Markets, said the increase was an "encouraging morsel" in an otherwise disappointing report.

Home construction is down nearly 6 percent over the past year. But permits are up nearly 8 percent. That suggests builders aren't working on new homes, but may be preparing to start dormant projects when the economy improves.

Builders typically begin construction on single-family homes six months after getting a permit. With apartment projects, the lag time can be up to a year.

Construction fell to its lowest levels in 50 years in 2009, when builders began work on just 554,000 homes. Last year was not much better and this year is shaping up to be just bad.

While home construction represents a small portion of the housing market, it has an outsize impact on the economy. Each home built creates an average of three jobs for a year and about $90,000 in taxes, according to the National Association of Home Builders.

After previous recessions, housing accounted for at least 15 percent of economic growth in the United States. Since the recession officially ended in June 2009, it has contributed just 4 percent.

Pierre Ellis, an economist at Decision Economics, said a "major revival" in home construction would be needed before there is any "discernible impact" on the economy.

Cash-strapped builders are struggling to compete with deeply discounted foreclosures and short sales, when lenders allow borrowers to sell homes for less than what is owed on their mortgages. And few homes are selling.

New-home sales fell in July to a seasonally adjusted annual rate of 298,000, the weakest pace in five months. This year is shaping up to be the worst for sales on records dating back a half-century.

Renting has become a preferred option for many Americans who lost their jobs during the recession and were forced to leave their homes. Still, the surge in apartments has not been enough to offset the loss of single-family homebuilding.

Another reason sales have fallen is that previously occupied homes are a better deal than new homes. The median price of a new home is nearly 28 percent higher than the median price for a re-sale. That's almost twice the markup in a healthy housing market.

The trade group said Monday that its survey of industry sentiment fell slightly to 14 in September. The index has been below 20 for all but one month during the past two years. Any reading below 50 indicates negative sentiment about the housing market. The index hasn't reached 50 since April 2006, the peak of the housing boom.



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