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Portfolio > Portfolio Construction

Home Building Slips in July, Leaving Construction Depressed

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WASHINGTON (AP) — Builders broke ground on fewer single-family houses in July, leaving home construction at depressed levels.

The Commerce Department said Tuesday that builders began work on a seasonally adjusted 604,000 homes last month, a 1.5% decrease from June. That’s half the 1.2 million homes per year that economists say must be built to sustain a healthy housing market.

Single-family homes, which represent 70% of home construction, fell 5%. Apartment building rose more than 6%.

Building permits, a gauge of future construction, declined 3.2%. Jill Brown, vice president of economics at Credit Suisse, said that decline suggests “very little forward momentum.”

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The number of homes under construction is the fewest in 40 years. Just 413,000 homes are under construction, after accounting for seasonal factors. A decade ago, roughly 1.6 million homes were built.

Though new homes represent just 20% of the overall housing market, they have 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.

Cash-strapped builders are struggling to compete with deeply discounted foreclosures and short sales. A short sale is when a lender allows the owner to sell for less than what is owed on the mortgage.

Over the past year, the number of finished apartments in the United States has surged nearly 63%, the biggest percentage jump since 1996. Renting has become a preferred option for many Americans who lost their jobs during the recession and were forced to leave their rapidly depreciating homes.

New-home sales fell in June to a seasonally adjusted pace of 312,000 homes per year. That’s less than half the 700,000 per year that economists consider to be healthy.

One reason for the slow pace is that previously occupied homes are a better deal than new homes. The median price of a new home is more than 30% higher than the median price for a re-sale. That’s more than twice the markup in healthy housing market.

After previous recessions, housing accounted for 15% to 20% of overall economic growth. This time around, between 2009 and 2010, housing contributed just 4% to the economy.

Despite historically low mortgage rates, few Americans are prepared to buy a home as the economy fizzles and job growth is stagnant.

“The now-extended period of ultra-low interest rates is not squeezing any new demand out of the rock,” said Pierre Ellis, an analyst at Decision Economics.

U.S. homebuilders are just as pessimistic about the depressed housing market as they were two years ago.

The National Association of Home Builders said Monday that its survey of industry sentiment was unchanged at 15 this month. The index has been below 20 for all but one month during the past two years. The index is just seven points above the lowest reading on record, in January 2009.

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.

Home construction in July was uneven across the country. Apartments fueled gains in the Northeast and South, with construction rising in those regions 34.7% and 5.6%, respectively. Despite an uptick in single-family homes, construction fell in the West by 3%. The Midwest saw a big 37.7% drop in construction activity.


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