Housing starts climb as building permits pick up

Last Year

Construction companies began work on 780,600 homes in 2012, a 28.2% increase from 2011 and the third straight annual gain. Even with the yearly improvement, housing starts remain short of the 2.07 million in 2005, a three-decade high reached at the peak of the boom.

As builders enter the spring selling season, the Federal Reserve may be set to extend it record monetary policy stimulus that has helped keep mortgage costs low and allowed for a rebound in housing, the industry that was at the center of the financial crisis.

Fed officials, who begin a two-day meeting today, have said they will keep their benchmark lending rate near zero as long as unemployment remains above 6.5% and inflation is projected to be no more than 2.5%. They also said during a January meeting they would keep buying $40 billion per month in mortgage bonds and $45 billion in Treasuries.

Housing is “a sector with huge upside potential for GDP and job creation,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “The upside from housing is probably the only thing that’s going to provide tailwinds strong enough to realize the substantial improvement to the labor market that the Fed is hoping for.”

Mortgage Rates

For those who qualify for home loans, cheaper borrowing costs are attracting buyers. The average rate on a 30-year, fixed-rate purchase loan was 3.63% last week, compared with 3.92% a year ago, according to McLean, Virginia- based Freddie Mac. The 30-year rate reached a record-low 3.31% in November.

Limited inventories and resilient sales are driving orders at builders such as PulteGroup Inc. and Lennar Corp. At the same time, lenders have imposed stricter standards on mortgages, an artifact of the subprime collapse that pushed the U.S. economy into its last recession, said Ara Hovnanian, chairman and chief executive officer of builder Hovnanian Enterprises Inc. in Red Bank, New Jersey.

‘Stricter’ Standards

“On the whole, we’re still seeing definitely stricter guidelines,” Hovnanian said on a March 6 earnings call. “Eventually, the pendulum, which has swung to the overcorrection mode in terms of difficult qualification because of what happened with subprime, that pendulum will come back to the middle and that should add a further boost to the housing recovery a little later in the cycle.”

Residential construction has added to economic growth since the second quarter of 2011, gains that filter to other parts of the economy as well, from appliance makers such as Whirlpool Corp. to retailers such as Lowe’s Cos.

Yesterday, a report showed that builder sentiment paused in March. The National Association of Home Builders/Wells Fargo index of confidence dropped by 2 points to 44. Readings below 50 mean more respondents said conditions were poor.

The group’s gauges of the sales outlook and customer traffic improved, according to the report, while an index of present single-family home sales fell to a five-month low.

Bloomberg News

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