New Home Construction Plunges in June
The housing market posted worse-than-expected performance last month while home builders’ confidence rises to a six-month high.
WASHINGTON – U.S. home construction fell in June to the slowest pace in nine months, a setback to hopes that housing is regaining momentum and will boost economic growth this year, the Commerce Department reported this week.
Construction fell 9.3% last month to a seasonally adjusted annual rate of 893,000 homes. That was the slowest pace since last September and followed a 7.3% drop in May, a decline even worse than initially reported.
Applications for building permits, considered a good indicator of future activity, were also down in June, dropping 4.2% to a rate of 963,000 after a 5.1% decline in May. Analysts, however, said that the June decline in construction may have been influenced by temporary factors such as heavy rain in parts of the South that could have held back housing starts in that region.
In a research note, Jennifer Lee, senior economist at BMO Capital Markets, said it was too soon to conclude that the housing recovery has stalled. “After all, job growth continues, mortgage rates are near their lows for 2014 and home builder confidence has been increasing,” she stated.
The overall weakness reflected a 9% fall in construction of single-family homes, the biggest part of the market, and a 9.9% drop in construction of apartments and other multifamily units. All of the June weakness was confined to the South, where about 40% of home construction occurs. Construction was up 14.1% in the Northeast, 28.1% in the Midwest and 2.6% in the West.
Home construction has struggled to gain traction this year, limiting its ability to contribute to economic growth. Part of the weakness reflected an unusually severe winter that hampered construction. But rising home prices, a rise in mortgage rates from historically low levels and tighter lending standards imposed since the financial crisis have also been a barrier, especially for potential first-time buyers.
There still is hope that housing will perform better in the second half of the year although Federal Reserve Chairwoman Janet Yellen told Congress this week that the slowdown in housing is one of the concerns at the Fed and that its forecast for an economic rebound may prove to be too optimistic.
The National Association of Home Builders, however, reported July 16 that home builder confidence surged in July, reflecting heightened expectations that the second half of the year will see rising sales. The builders’ sentiment index rose to 53, up four points from a revised reading of 49 in June. Readings above 50 indicate more builders view sales conditions as good rather than poor. The July reading was the first month above 50 since January when the index stood at 56.
New home sales surged 18.6% in May to a seasonally adjusted annual rate of 504,000, the highest level in six years, while sales of previously owned homes rose 4.9%, the biggest one-month gain in nearly three years, to a rate of 4.89 million homes. Even with the big May increases, sales of new homes are still running at just about half the pace of a healthy real estate market.
Economists expect there is a lot of pent-up demand for homes after many potential buyers put off purchases during the 2007-2009 recession and the weak recovery since that time. Job growth has accelerated in recent months, with an increase of 288,000 jobs in June. That has helped to push down the unemployment rate to a nearly six-year low of 6.1% in June.
There is optimism that employers will step up their hiring further in the second half of this year as they respond to a rebound in overall economic growth following a weak winter.
The economy shrank at an annual rate of 2.9% in the January-March quarter but analysts believe growth rebounded to around 3% in the April-June quarter and will remain around that level for the remainder of this year, the Associated Press reports.
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