June 19 (Bloomberg) -- Builders in the U.S. broke ground on fewer homes than forecast in May as a slump in the construction of apartments swamped a pickup in single-family houses.
Starts dropped 4.8 percent to a 708,000 annual pace from a revised 744,000 rate in the prior month that was the highest since October 2008, the Commerce Department reported today in Washington. The median forecast of 77 economists surveyed by Bloomberg News called for a 722,000 pace.
Building permits, a proxy for future construction, climbed to the highest level since September 2008, showing the combination of lower prices and record-low mortgage rates is underpinning demand and encouraging new projects. At the same time, competition from cheaper previously owned properties and stricter lending standards remain hurdles for an industry that’s been the weakest link for the economic expansion.
“We saw a very strong number in new permits, indicating builders are seeing improving demand,” said Russell Price, senior economist at Ameriprise Financial Inc. in Detroit. The report “was a lot better than the headline number would suggest.”
Housing starts, unadjusted for seasonal variations, were up 26 percent in the 12 months ended in May.
Building permits increased 7.9 percent to a 780,000 annual rate, reflecting gains in single-family and multifamily homes.
Stock-index futures held gains after the figures, with the contract on the Standard & Poor’s 500 Index expiring in September rising 0.2 percent to 1,344 at 8:51 a.m. in New York. The yield on the benchmark 10-year Treasury note climbed to 1.58 percent from 1.57 percent late yesterday.
Fed Meeting
The Federal Reserve’s Open Market Committee, which sets the course of central bank policy, begins a two-day meeting today to decide whether more monetary stimulus is needed to boost growth as the labor market stumbles and risks from Europe’s sovereign debt crisis rise.
Estimates in the Bloomberg survey for May housing starts ranged from 685,000 to 750,000.
Construction of single-family houses increased 3.2 percent to a five-month high 516,000 rate, from 500,000 a month earlier, today’s figures showed. Work on apartment buildings and other multifamily units decreased 21.3 percent to an annual rate of 192,000 in May, the slowest this year, from 244,000 a month earlier.
Three of four regions had a decrease in overall starts in May, including a 13.3 percent decline in the Midwest and a 20.3 percent drop in the Northeast. Starts in the West rose 14.4 percent.
A report yesterday showed confidence among U.S. homebuilders climbed in June to a five-year high. The Washington-based National Association of Home Builders/Wells Fargo index of sentiment rose by 1 point to 29, the highest since May 2007.
Cheaper homes, low mortgage rates and enough of an increase in household income drove housing affordability to an all-time high in the first quarter, according to the National Association of Realtors.
The average rate on a 30-year, fixed-rate mortgage reached a record low of 3.67 percent in the first week of June, according to Freddie Mac.
Another reason for optimism on the outlook for construction is that Americans are forming households faster than new homes are being built, said Douglas Yearley, chief executive officer of Toll Brothers Inc., a luxury homebuilder based in Horsham, Pennsylvania.
Borrowing Costs
“There is huge pent-up demand that has built over the last four years from this imbalance,” Yearley said at a June 14 conference. “It’s been seven years since this all began to turn down and you have people that are just ready to move on with their lives, take advantage of great interest rates.”
At the same time, three years after the end of the recession, a stronger housing recovery remains elusive. More distressed properties are going on the market, adding to inventory and pushing down prices.
Foreclosure starts grew in May on an annual basis for the first time since January 2010, after the largest U.S. loan servicers settled with states over faulty documentation, according to a report last week from RealtyTrac Inc., a real estate data provider in Irvine, California. Home seizures plunged 18 percent from a year earlier, the report also showed, a sign that banks are turning to repossession alternatives, RealtyTrac Inc. said today.
Weak job gains and stock market volatility also have consumers apprehensive about taking on debt.
“Our forecast is still for growth but we’re being conservative about it,” said Doug Duncan, chief economist at Washington-based Fannie Mae. “This will definitely be a year where we’ll see growth in the housing market.”
