U.S. home construction makes slow but steady comeback

WASHINGTON -- Builders are putting up more new houses than they have in nearly four years, a long-awaited recovery that could help energize the U.S. economy.

From areas like Phoenix that are finally arising from the housing bust to Chicago and Minneapolis, where strong economies have lifted demand, the outlook for home building looks healthier than at any time since sales and prices collapsed in 2007.

"We've been hoping for this for a long time," said Celia Chen, a housing economist at Moody's Analytics. "It looks like things are turning."

The improvement has been gradual. But builders are responding to interest from buyers, who are drawn by reduced prices, record-low mortgage rates and rising rents, which have made home purchases comparatively appealing. And the supply of new homes has shrunk to near-record lows.

The increased construction coincides with rising sales, prices, builder confidence and stock prices for homebuilder companies. The stocks of the 13 U.S. builders whose shares are publicly traded have increased an average 60 percent this year. By contrast, the Standard & Poor's 500 stock index is up about 9 percent.

Last month, U.S. builders broke ground on the most homes in nearly four years. Single-family home building -- the bulk of the market -- rose for a fourth straight month. Permits to build single-family homes reached their highest point since March 2010.

The news helped boost stock prices Wednesday. The Dow Jones industrial average rose 87 points in afternoon trading. And homebuilders' stocks gained. KB Home and Hovnanian Enterprises both gained nearly 1 percent.

Home construction still has a long way to go. June's seasonally adjusted annual rate of 760,000 is the highest since October 2008. But it's only about half of the 1.5 million annual pace that economists consider normal.

From the depth of the housing bust in April 2009, when the seasonally adjusted annual rate bottomed at 478,000 homes, the improvement has been slow but steady.

Building increased in early 2010 as the government's tax credits for homebuyers lifted sales. Beginning that summer, the pace essentially stalled until late 2011, when it began rising gradually.

A continued resurgence would benefit an economy weakened by tepid job growth and sluggish consumer spending. A healthy pace of 1.5 million new homes a year would lower the unemployment rate by about 1.5 percentage points and create 50,000 additional jobs a month, according to calculations by Joel Prakken, chairman of Macroeconomic Advisers. About half the jobs would be construction workers and contractors.

It would also add roughly 0.5 percentage point to annual economic growth, Prakken estimates.

Economists at IHS Global Insight, a consulting firm, caution that they don't foresee starts reaching 1.5 million a year until 2015. At the current lower levels, home construction will likely have only a modest effect on the economy.

New homes represent just 20 percent of the home market. But each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to data from the homebuilders association.

Recoveries from recessions are typically powered by home construction, which creates jobs across many industries and drives economic growth. This recovery is different.

Construction was so depressed by the housing bust and the worst financial crisis since the Great Depression that its gains have been painfully slow. The economy has benefited only slightly.

But the pace of construction, and requests for permits, have picked up in many of the largest U.S. cities in the past year. Some of those gains reflect bounce-backs by areas devastated by the housing bust.

For example, permits for new homes jumped 85 percent in Phoenix in the 12 months that ended in May, according to an estimate by Moody's Analytics. May is the latest month for which figures are available.

Permits are 76 percent higher in Miami than a year ago, Moody's estimates. Nationwide, they've risen 27 percent.

Even cities that largely escaped the housing bust are faring well. Permits have jumped 88 percent in Chicago, 53 percent in Minneapolis and 26 percent in San Diego. In these cities, construction has been so low for so long that normal population growth and demand for new homes has helped increase building.

In many cities that endured a boom and bust, developers are building in unfinished subdivisions, said Mark Vitner, an economist at Wells Fargo Securities. Land there is generally cheap. And builders can sell at prices low enough to compete with foreclosures.

Foreclosed homes, in turn, have become less attractive, Vitner noted. Most of the better properties have already been bought, many by investors. The ones left over are usually undesirable because they're far from city centers or in poor condition.

"It's like going to an after-Christmas sale after New Year's," Vitner said. "The best stuff is long gone."

Foreclosures are still ticking up nationwide, Chen said. But in some cities, such as Las Vegas, banks still face legal hurdles to foreclosing. That's keeping the overall supply of homes below demand and encouraging builders to step up construction.

Across the country, despite increased building, few new homes are available. There were only 145,000 new homes available in May -- just above April's 144,000, which was the lowest on records dating to 1963.

Those trends are raising builders' confidence about the future. The National Association of Home Builders/Wells Fargo builder sentiment index this month jumped to its highest level since March 2007. The index is based on responses from 318 builders.

Builders also report higher turnouts by prospective buyers.

One such builder is McMillin Homes, which sells houses in Texas and California's Central Valley. It's ramped up construction this year.

Sales jumped 80 percent at McMillin's California communities in the first half of the year compared with the same period last year. And it plans to open five developments in Texas this year.

Customer traffic is up. And buyers are purchasing homes well before they're built. McMillin has also been able to raise prices.

"We see enough indicators that tell us we're coming off the bottom, finally," said Rey Ross, a senior vice president.

In its report Wednesday on home construction, the Commerce Department noted that the gains in single-family home building were broad-based: Housing starts rose in every U.S. region in June, led by the West.

"This was a good report," said Martin Schwerdtfeger, an economist at TD Bank.

The growth in construction permits "suggests that the momentum in building activity observed in recent months should carry forward," he said.

The housing market is improving even while the rest of the economy has weakened. Federal Reserve Chairman Ben Bernanke highlighted those gains in an otherwise gloomy report to Congress on this week. Many economists say housing construction could contribute to overall economic growth this year for the first time since 2005.

Sales of new homes rose in May to the fastest pace in more than two years. And while sales of previously occupied homes dipped in May, they were nearly 10 percent higher than a year earlier.

The economy is growing only modestly, and job creation has slowed sharply in the past three months. If those trends worsen, home building could slow in coming months.

Even Ross, the McMillin executive whose company is enjoying increased home sales, said those gains aren't enough to require hiring.

"We're not quite there yet," he said.

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AP Business Writers Paul Wiseman in Washington and Alex Veiga in Los Angeles contributed to this report.