U.S. home builders ramped up construction in April to the fastest pace in nearly seven-and-a-half years, hinting at newfound momentum for an economy that has struggled in recent months.
The U.S. Commerce Department said Tuesday that housing starts last month increased 20.2 percent to a seasonally adjusted annual rate of 1.14 million homes. That pace ranks as the fastest clip since November 2007.
Builders appear to have finally shaken off a turbulent winter that shut down construction sites and hampered growth across the economy. The sharp rebound in housing starts after disappointing data in March and February indicates that economic growth might accelerate after being close to flat in the first quarter. It also suggests that builders are responding to tight inventories of existing homes and increased buyer demand due to stronger hiring over the past year and low mortgage rates.
"This report should help to assuage fears over the slowdown experienced by the U.S. economy in recent months," said analyst Michael Dolega, senior economist at TD Bank.
Housing starts surged in the Northeast, Midwest and West, while slipping slightly in the South. Construction of single-family houses climbed 16.7 percent in April, an indication that sales of new homes should also rise in the coming months. Apartment building shot up 31.9 percent.
Approved building permits rose increased 10.1 percent from March to an annual rate of 1.14 million in April.
Sales of existing homes jumped 6.1 percent in March to a seasonally adjusted annual rate of 5.19 million, the National Association of Realtors said last month. But the market has just 4.6 months of supply, compared to six months in what economists consider to be a healthy market. An upswing in housing starts in April -- which would put the rate of construction at its fastest clip in three months -- could signal that builders are gearing up to meet demand.
Without more inventory coming onto the market quickly, home prices will likely rise, potentially putting them out of reach for thousands of would-be home buyers.
The fast-rising prices may be destabilizing several regional housing markets, according to an analysis by Florida-based appraiser Smithfield & Wainwright.
HOME PRICES UNSUSTAINABLE?
Home values in 14 states -- including Colorado, Massachusetts and Oregon -- are significantly higher than both the rental income those properties could generate and the cost of rebuilding those homes. Appraisers have historically used these two measures to assess houses. This particular mismatch suggests that home prices cost at least 10 percent more than either of these measures, a sign that home prices may be at unsustainable levels and could stagnate or even plunge.
Despite the higher prices and increased demand, home builder confidence has ebbed in recent months.
The National Association of Home Builders/Wells Fargo builder sentiment index released Monday slipped to 54 this month, down two points from 56 in April. Any reading above 50 signals expansion, yet the decrease suggested that builders still see would-be home buyers as cautious.
Optimism has faded as the economy has entered into a unique predicament -- hiring is more solid, yet overall economic growth is feeble.
Employers added 223,000 jobs in April, causing the unemployment rate to slip to 5.4 percent from 5.5 percent. The economy has gained about 3.1 million new jobs -- and paychecks -- over the past 12 months.
But the economic growth that those paychecks should fuel has yet to materialize. The U.S. economy expanded at an annual rate of 0.2 percent in the first quarter. Before the release of the home construction report, growth was on track for a dismal yearly rate of 0.7 percent in the second quarter, according to estimates by the Atlanta Federal Reserve.