Home Builders Not Driving Economic Recovery

Despite an improvement in housing starts, broad weakness in residential construction persists.

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Home builders won't be spearheading a broad-based economic recovery any time soon, fresh data on the residential construction market suggests.

The Commerce Department said Tuesday that builders broke ground on new homes at an annual rate of 546,000 in July. While that's 1.7 percent higher than June's level, it's less than what economists had expected. Housing starts in July were 7 percent below year-earlier levels.

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Despite the slight monthly improvement in starts, economists said details in the report indicated weakness in the market. For example, much of the increase in total housing starts was linked to a 33 percent surge in multifamily starts. Multifamily starts, however, tend to be volatile and represent a much smaller portion of the total market than single-family starts, which slumped about 4 percent during the month. "Single-family starts have now declined three consecutive months and suggest that the housing market is still looking for a bottom," Michael Gapen of Barclays Capital said in a report.

Meanwhile, permits to build new single-family homes—a key yardstick of future construction activity—dropped 1 percent from June to July. "Single-family permits, the most important number in this report, slipped for the fourth straight month, falling to the lowest level since April 2009," Patrick Newport, a U.S. economist for IHS Global Insight, said in a report. "Although housing starts were up for the month, the permits numbers point to lackluster starts numbers over the next two months."

The data comes one day after a report showed that home builder confidence in August was its weakest since March 2009. "Builders are expressing the same concerns that they are hearing from consumers right now, particularly the sense that the overall economy and job market aren't gaining any traction," Bob Jones, chairman of the National Association of Home Builders—which published the report—said in a statement Monday.

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Home building activity increased this spring as consumers scrambled to take advantage of the $8,000 federal home buyer tax credit. But alongside sales, housing starts have dropped precipitously following the April 30 contract-signing deadline.

Brian Wesbury, chief economist for First Trust Portfolios, expects home building activity to pick up once the distortions associated with the tax credit pass. "Last year, the government's cash-for-clunkers program moved a great deal of motor vehicle activity into July/August," Wesbury said in a report. "There was then a temporary hangover in September, followed by a healthy recovery driven by underlying economic fundamentals. We think a similar pattern will take place in housing, after a temporary hangover due to the lapsing of the home buyer tax credit."

Newport says the labor market holds the key to a revival in the home construction industry. "New jobs will require that new homes be built nearby," he said in a report. "More important, the household formation rate will pick up once job growth takes off. Increases in the household formation rate, in turn, will reduce the housing glut, and this will stimulate new construction."

But until demand resurfaces, the home building industry won't be playing its traditional role in this economic recovery, says Mike Larson of Weiss Research. "Normally an upswing in construction helps the economy emerge from recession. But not this time," Larson said in a report. "Since there's so much competition from nearly-new distressed inventory and foreclosures, builders aren't willing or able to ramp up activity. Hence, no housing recovery."