Volatile apartment sector reduces US home building

Friday, September 12, 2014, Vol. 38, No. 37

WASHINGTON (AP) — U.S. home construction plunged in August, led by steep decline in the volatile apartment category. But single-family house construction, a larger and more stable portion of the market, fell only modestly.

Construction fell 14.4 percent in August to a seasonally adjusted annual rate of 956,000 homes, the Commerce Department said Thursday. This reverses the sharp gains in July when the rate of new construction rose to 1.12 million homes, the highest annual rate since 2007.

Last month's decrease primarily came from builders starting fewer apartment complexes, which plummeted 31.5 percent compared to July. Apartments have propelled much of the growth in residential construction over the past year, but the pace has been volatile from month to month. Apartment starts surged 51 percent in July.

In August, the building of single-family houses fell 2.4 percent.

Applications for building permits, a sign of future activity, dipped 5.6 percent to an annual rate of 998,000.

Apartment construction has surged 19.2 percent in the past 12 months. Meanwhile, single-family starts have risen just 4.2 percent. The shift among builders to increased apartment building is a sign that a rising share of Americans will be renters, rather than homeowners.

Jed Kolko, chief economist at the real estate firm Trulia, said that builders are already constructing too many single-family houses. The vacancy rate for these homes was 10.7 percent in 2013, compared to 7.4 percent in 2000, according to the Census.

"We're still building single family homes faster than we can fill them," said Kolko, saying that builders will need to place a greater emphasis on apartments.

Changes in starts for multi-unit homes such as apartments influence the monthly construction totals, but the category accounted for just 32 percent of starts in August. That's up slightly from 29 percent in August 2013.

The growing preference for rentals likely reflects the sluggish, five-year economic recovery. Most incomes remain below their pre-recession levels, making it harder for families to save for a down payment and qualify for a mortgage. The Census Bureau said this week that median household incomes were $51,939 in 2013. Adjusting for inflation, that's 8 percent lower than in 2007, when the recession began.

Still, solid job growth for much of 2014 has increased the total number of paychecks in the economy. When more people are working, that should provide a boost for home construction.

One measure of building confidence has been steadily improving for the past four months.

The National Association of Home Builders/Wells Fargo builder sentiment index rose in September to 59, the highest reading since November 2005. Readings above 50 indicate more builders view sales conditions as good rather than poor.

Builders see sales activity and traffic from would-be buyers as improving. Still, interest from first-time buyers continues to lag historical averages.

New homes are selling for an average price of $339,100, according to the Commerce Department. Those prices, coupled with weak wage growth, have made affordability a problem for potential buyers seeking a new home.

But economists are still looking for a rebound heading into the tail end of the year. Job gains through August have averaged more than 215,000 a month this year.

Though new homes represent only a fraction of the housing market, they have an outsize impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the Home Builders.