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Rise in home construction suggests a turnaround

In this Nov. 22, 2011 photo, construction worker Will Capper works on a new house in Palo Alto, Calif. A surge in apartment construction gave builders more work in November. But 2011 is still shaping up to be one of the worst years in history for homebuilders. In this Nov. 22, 2011 photo, construction worker Will Capper works on a new house in Palo Alto, Calif. A surge in apartment construction gave builders more work in November. But 2011 is still shaping up to be one of the worst years in history for homebuilders. (AP Photo/Paul Sakuma)
By Derek Kravitz
AP Real Estate Writer / December 20, 2011
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WASHINGTON—The depressed housing market has held the economy back for four years.

No longer.

Home construction has finally begun a gradual comeback and should add to the nation's economic growth in 2011, a turning point in the recovery from the Great Recession.

The main reason appears to be a positive consequence of the weak economy: Apartments are being built almost twice as fast as two years ago. Renting is the only option for many people who have lost their jobs, their homes or both.

Builders in November broke ground on homes -- houses and apartments alike -- at an annual rate of 685,000, the government said Tuesday. That was a 9.3 percent jump from October and the fastest pace since April 2010.

The numbers show how far the housing industry has come and still has to go:

-- Builders should start at least 600,000 homes this year. That's up from 587,000 last year and 554,000 in 2009 -- the worst year on record. In a healthy market, economists say, about 1.2 million homes are started each year.

-- The pace of apartment construction has soared. About 175,000 will be started this year, also roughly half the number in a healthy economy. But it's far more than the 97,000 apartments begun in 2009.

-- Single-family home construction, which accounts for about 70 percent of the housing industry, has essentially stalled for three years. This year will probably turn out to be the worst in the half-century records have been kept.

Construction of single-family homes this year could reach 440,000. That would be below last year's 471,000. In a good economy, builders would break ground on about 840,000 homes.

New homes are 20 percent of the housing market but have an outsize economic impact. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.

Since the recession began in December 2007, housing has subtracted between 0.5 and 1.1 percentage points from U.S. economic growth each year. Cuts in spending by homeowners have further reduced growth.

But economists say apartments are going up so fast that housing should add to economic growth this year, even if fewer families are buying houses. The U.S. economy grew at a 2 percent clip last quarter.

"Finally, it appears that the process of healing is under way," says Joel Naroff, president and chief economist at Naroff Economics.

The better-than-expected housing data helped the stock market shoot higher. The Dow Jones industrial average rose 337 points, its fifth-best performance of the year, and closed back above 12,000.

Housing stocks had an even bigger day. PulteGroup Inc., a home construction and mortgage company, rose more than 10 percent, the best performance in the Standard & Poor's 500.

Patrick Newport and Michelle Valverde, U.S. economists at IHS Global Insight, said in a note to clients that the figures demonstrate that the housing industry is "finally getting off the mat."

The industry seems to think so, too. A survey of industry sentiment this week found builders were more optimistic than at any time since May 2010.

But the numbers remain weak, even though mortgage rates are near record lows and home prices have fallen by a third since 2006.

Tighter lending standards are preventing many families from buying houses, and diminished prices on single-family homes have given the industry little reason to build more. Builders are also competing with foreclosures, which hold prices down.

Yet they have found a way to make money -- by serving the rising demand for rental apartments.

"When you have a slowdown in home sales and a growth in population, there's a lot of pent-up demand for apartments," says Mark Dellonte, president of Love Funding, which provides loans for apartment construction across the country.

In July, Love Funding started work on a 130-unit apartment building in Bethesda, Md., near Washington, with a $60 million government loan. The builder says it expects every apartment to be occupied when the project is completed at the end of 2012.

Builders have a strong incentive: Rents are rising as people flock to apartments. The average rent has risen 2.4 percent this year to $1,004 a month, according to the real estate data firm Reis Inc. It rose 1 percent last year and fell 2.7 percent in 2009.

Between 2005 and 2010, including the Great Recession, 4 million American households became renters, according to Harvard's Joint Center for Housing Studies -- 10 times what would be expected in a normal economy.

And if government population estimates hold true, at least 2 million households will become renters each year through 2020. That means 400,000 apartments will need to be built each year to keep up with demand.

"For a lot of reasons, many Americans, especially young people, don't want to buy a home anymore," says Dan McCue, research manager for Harvard's Housing Studies Center. "That means the renting population is going to keep growing, and builders are just starting to catch on."

Builders typically begin construction on single-family homes six months after getting a permit. With apartment projects, the lag time can exceed a year. That helps explain why the surge of apartment construction is happening now when rents have been rising for two years.

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