Demand for Rental Apartments Buoys Housing Starts

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John Bazemore/AP
By Lucia Mutikani

WASHINGTON -- U.S. housing starts rose solidly in September on soaring demand for rental apartments, a sign that the housing market continues to steadily improve even as economic growth has slowed.

The Commerce Department said Tuesday groundbreaking increased 6.5 percent to a seasonally adjusted annual pace of 1.21 million units. It was the sixth straight month that starts were above 1 million units, suggesting a sustainable housing recovery that could shield the economy against global headwinds.

%VIRTUAL-pullquote-The report provides further confirmation that the U.S. housing recovery remains on track...%"The report provides further confirmation that the U.S. housing recovery remains on track, and the buoyancy in the housing sector is likely to remain an important source of support for household confidence and economic activity more generally," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Housing is one of the few bright spots in the economy, which has been slammed by softening global demand and a strong dollar, which have undercut exports. Efforts by businesses to reduce an inventory bulge and weak capital spending in the energy sector have also been a drag.

Economic activity has braked sharply, with third-quarter growth estimates running below a 1.5 percent annualized rate. The economy grew at a 3.9 percent rate in the second quarter.

Although residential construction accounts for a fraction of gross domestic product, housing has a broader impact on the economy, with rising home prices boosting household wealth and therefore supporting consumer spending.

Economists say strong domestic demand and firming housing strengthen the argument for the Federal Reserve to raise interest rates this year.

"But the Fed seems to be using binoculars to look at the economy, as it is the rest of the world, not domestic demand, that seems to be the focus of attention," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

"The U.S. economy may not be booming, but it is in pretty decent shape," he added.

Economists had forecast groundbreaking on new homes rising to a 1.15 million-unit pace last month.

The S&P homebuilding index rose more than 2 percent, outperforming a marginally weaker stock market. D.R. Horton (DHI), the largest U.S. homebuilder, gained 1.78 percent. Lennar (LEN), the nation's second-largest homebuilder, advanced 2.5 percent.

The dollar slipped against a basket of currencies and prices for Treasury debt fell.

Renting in Vogue

Starts for multifamily projects surged 18.3 percent to a 466,000 unit pace, the highest level since June. Multifamily construction is being driven by demand for rentals, especially by millennials, who cannot afford to buy their own homes because of higher prices and debt burdens.

Groundbreaking for single-family homes, the largest segment of the market, rose 0.3 percent to a 740,000 unit pace. Economists say single-family building is being constrained by land and labor shortages.

"The continued demand for rentals, as well as the tight supply in the single-family home market, is expected to keep housing construction rising," said David Nice, an economist at Mesirow Financial in Chicago.

Starts in the South, where most of the home construction takes place, rose 0.6 percent to their highest level since October 2007. Groundbreaking on housing projects in the West was the highest since July 2007.

Though building permits fell 5 percent to a 1.10 million-unit rate last month, a six-month low, the weakness is likely to be temporary amid strong confidence levels among homebuilders.

A survey Monday showed builders' confidence rose to a near 10-year high in October, with builders upbeat about current sales conditions and expectations over the next six months.

Single-family building permits slipped 0.3 percent last month. Multifamily building permits dropped 12.1 percent, with permits for buildings with five units or more falling to their lowest level in nine months.

Permits for single-family homes in the South rose to their highest level since January 2008.

9 Numbers That'll Tell You How the Economy's Really Doing
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Demand for Rental Apartments Buoys Housing Starts
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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