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Boost in Home Construction & Sales Means Good News for Housing Market

December 23, 2011

in This Week in Real Estate

Housing Construction Soars in November

housing construction soarsShowing a glimmer of hope, home construction spiked in November, ringing in a celebratory mood in the industry. Housing starts reached the highest levels in 19 months, according to the Commerce Department, touching a seasonally adjusted annual rate of 685,000 units. On a month-to month basis, construction was up 9.3 percent when compared to October. On an annual basis, starts rose 24.3 percent when compared to the year-ago period.

Yet, those numbers trail behind the 1 million to 1.5 million mark that analysts deem to be the sign of a healthy market. As we have said earlier, it’s still a long way to recovery. But we seem to be taking baby steps toward it. Paul Diggle, an economist at Capital Economics, was quoted in the Wall Street Journal saying that starts will continue to improve, but we won’t see the 1 million mark until 2015.

The construction numbers last month were helped by the onslaught of demand for apartments, town homes and other multifamily units, the Journal said. In an economy where lending is tight and future still shaky, consumers are preferring to rent rather than buy. Demand for rental units has created a need for a supply of inventory, and builders are finally taking notice. Multifamily units saw a 25.3 percent hike in construction, compared to single family homes starts, which hovered at a dismal 2.3 percent.

“The next ‘boom’ in residential construction is under way, especially in the South and West, but it is in multifamily rather than single-family homes,” wrote Steve Blitz, senior economist with ITG Investment Research, according to the Journal. “With the return to rationality in mortgage lending one can think of this as the beginning of a long overdue reversion to the mean.”

Building permits, a measure for future construction, rose 5.7 percent to an annual rate of 681,000. That’s the highest it has been since March 2010, the Journal said. So, hopefully this positive trend will continue well past the New Year.

Existing Home Sales Rise

In another set of good news, sales of existing homes rose to a 10-month high last month, according to the National Association of Realtors®. Home sales jumped 4 percent to a 4.42 million pace. The sales numbers are on track to surpass last year’s level, according to the Wall Street Journal.

“Perhaps signs of life are increasing for the housing market,” Ellen Zenter, a senior U.S. economist at Nomura Securities International Inc., in New York, told Bloomberg.

Zenter doesn’t foresee housing to be a drag on economic growth next year.

Zenter may be right. With sales numbers and housing starts on an uptick, things may finally be picking up for the industry. Unemployment, payment defaults and foreclosures have hammered the housing market, scaring off homebuyers, construction companies and sellers. With sales and housing starts rising, things may slowly be turning around.

“That’s not to say that risks don’t abound,” Zenter said. “We know there’s a substantial shadow inventory of distressed properties that we’re still waiting to come onto the market.”

Housing Bust Worse Than Previously Thought

The National Association of Realtors® said this week that they had some of their numbers wrong. The group overestimated home sales by 14.3 percent between 2007 and 2010. That number translates to a whopping 2.9 million homes.

NAR blamed the oversight on shifts in the market. It’s good that this news is coming to light now when we seem to have already weathered the worst of the housing slump. With the new sales gain posted in November, the market seems to be on an uptick and hopefully it will stay this way. NAR also said that inventory levels dropped 18.1 percent in November compared to the year-ago period. That’s the lowest since Spring 2005, according to the Wall Street Journal. Low inventory is usually a good sign, but according to the Journal it may be an indication that sellers are taking their products off the market because they are done with reducing prices. Less inventory could lead to frustrated buyers, who might stay away from the market because of lack of choice thereby dragging down the market and starting another vicious cycle.

“It’s our biggest issue right now. They lose interest because there just isn’t anything to buy,” said Ron Leis, a real estate agent in Sacramento, Calif. to the Journal.

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