WASHINGTON -- U.S. builders started slightly fewer homes in October but submitted plans for a wave of apartments, a mixed sign for the struggling housing market.
Builders broke ground on a seasonally adjusted annual rate of 628,000 homes last month, the Commerce Department said Thursday. That's roughly half the 1.2 million that economists equate with a healthy housing market.
But building permits, a gauge of future construction, rose nearly 11 percent. The increase was spurred by a 30 percent increase in apartment permits, which reached its highest level in three years.
Over the past year, apartment permits have surged roughly 63 percent. Single-family permits have increased just 6.6 percent in that span.
The Economy's 'Weak Link'
Renting has become a preferred option for many Americans who lost their jobs during the recession and were forced to leave their homes. The surge in apartments may help boost economic growth, but it has not been enough to offset the steep declines in single-family homebuilding.
"Given continued constraints on homeownership and rising rents across the country, the trend towards multi-unit construction is one that we expect to continue going forward," said James Marple, senior economist at TD Economics.
New-home construction and sales are in the midst of one of its worst years in history. Demand for new homes is weak and historically-low mortgage rates and plunging home prices have done little to help.
Jennifer Lee, senior economist at BMO Capital Markets, said the housing industry continues to be the U.S. economy's "weak link." But the October report wasn't as bad as many analysts had expected.
Single-family homes, which make up about 70 percent of residential home construction, rose nearly 4 percent last month. Apartments, a more volatile category, fell more than 13 percent.
Overall, homebuilding dipped in 2009 to just 554,000 homes, the lowest levels in 50 years in 2009. Last year the figure rose to roughly 587,000 homes and this year may not be much better.
Cash-strapped builders are struggling to compete with deeply discounted foreclosures and short sales, when lenders allow borrowers to sell homes for less than what is owed on their mortgages. And few homes are selling.
Though new homes represent just 20 percent of the overall home market, they have an outsized impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in taxes, according to the National Association of Home Builders.
After previous recessions, housing accounted for at least 15 percent of economic growth in the United States. Since the recession officially ended in June 2009, it has contributed just 4 percent.
Sales of new homes rose in September after four straight monthly declines, largely because builders cut their prices in the face of weak demand. Sales hit a six-month low in August and this year is shaping up to be the worst since the government began keeping records a half-century ago.
Another reason sales have fallen is that previously occupied homes are a better deal than new homes. The median price of a new home is about 30 percent higher than the median price for a re-sale. That's almost twice the markup in a healthy housing market.
The homebuilders' trade group said Wednesday that its survey of industry sentiment rose this month to 20, the highest level since May 2010. Still, any reading below 50 indicates negative sentiment about the housing market. The index hasn't reached 50 since April 2006, the peak of the housing boom.
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Housing Starts Drop, But Future Construction Looks Hopeful
With housing prices down and mortgage rates at all-time lows, the real estate market is ripe for investors looking to cash in on the one sector that's booming: rental demand. As a recent Move.com report suggests, college towns make the perfect fit for would-be landlords: Growing enrollment means demand for off-campus housing will only increase. Pair that stability with an expected 5% rise in rental rates, and university towns emerge as very promising real estate investment territory. Here are Move.com's 10 top towns for real estate investors.
Median List Price: $335,000
Y/Y% Change: -2.62%
Average 2 Bedroom Rent: $3,122
Average 3+ Bedroom Rent: $3,913
Average Mortgage: $1,370
Home to two of the top-ranked colleges in the U.S., Harvard and MIT, it hosts 48 others as well. The median list price is second highest in the rankings, while the average rental rates top all others.
Median List Price: $189,900
Y/Y% Change: -0.05%
Average 2 Bedroom Rent: $949
Average 3+ Bedroom Rent: $1,020
Average Mortgage: $770
Nashville encompasses 16 colleges and universities, including top-ranked Vanderbilt University. Many of the school dorms are filled to capacity, according to Move's report, forcing a significant number of students to seek off-campus housing.
Median List Price: $199,900
Y/Y% Change: -16.36%
Average 2 bedroom Rent: $1,780
Average 3+ Bedroom Rent: $2,074
Average Mortgage: $820
The No. 1 most searched city in the country on Realtor.com in June, Chicago hosts a number of universities including No. 12 ranked University of Chicago. The difference between mortgage and rental rates creates the potential for significant profit margins.
Median List Price: $242,700
Y/Y% Change: -7.72%
Average 2 bedroom Rent: $1,443
Average 3+ Bedroom Rent: $1,663
Average Mortgage: $990
Home to the No. 1 ranked university Johns Hopkins University Baltimore's median list price is fairly high on the list. But those prices are falling. In June, the city was the 19th most searched market on Realtor.com.
Median List Price: $163,945
Y/Y% Change: -3.41%
Average 2 bedroom Rent: $1,016
Average 3+ Bedroom Rent: $1,283
Average Mortgage: $670
St. Louis has a median list price of $163,945 and its rental rates provide generous profit margins.
Median List Price: $375,000
Y/Y% Change: 5.63%
Average 2 bedroom Rent: $3,086
Average 3+ Bedroom Rent: $3,214
Average Mortgage: $1,530
As Washington, D.C. further revamps its image, already pricey rental rates will continue to increase. The city hosts more than 20 colleges, including Georgetown University.
Median List Price: $159,600
Y/Y% Change: -13.68%
Average 2 bedroom Rent: $1,236
Average 3+ Bedroom Rent: $1,485
Average Mortgage: $650
Atlanta boasts 19 colleges, and its average two-bedroom property pulls in almost twice as much revenue as what an owner must pay in mortgage costs.
Median List Price: $174,900
Y/Y% Change: -0.06
Average 2 Bedroom Rent: $1,218
Average 3+ Bedroom Rent: $1,478
Average Mortgage: $710
Houston has more than 10 colleges and universities, and its low-priced inventory makes buying there a promising investment that could pay off in the future.
Median List Price: $112,900
Y/Y% Change: 7.53%
Average 2 bedroom Rent: $790
Average 3+ Bedroom Rent: $880
Average Mortgage: $460
South Bend has 12 colleges and universities, whose rental rates provide healthy profit margins. But perhaps the biggest draw of the place is that its home price market appears to be on the upswing, even as so many others in the country continue to limp along.
Y/Y% Change: -3.13%
Average 2 bedroom Rent: $838
Average 3+ Bedroom Rent: $970
Average Mortgage: $630
Syracuse, located in upstate New York, has a number of local colleges and universities with students who must appreciate the low rental rates there. At $154,900, its median listing price is below the national average of $189,900.