WASHINGTON -- Construction of single-family homes cooled off slightly in January after surging in the final month last year. But a rise in permits suggests that builders are growing more confident that more buyers are ready to come off the sidelines.
The Commerce Department said Thursday that builders broke ground on a seasonally adjusted annual rate of 699,000 homes in January. That's up 1.5 percent from December and nearly matches November's three-year high for starts.
Construction began on 508,000 single-family homes last month. That's a 1 percent drop from December and the first decline in four months. A big rise in volatile apartment construction helped offset the decline in single-family homes.
Still, December single-family homes were revised up strongly to show builders started 513,000 homes -- a 12 percent gain from November.
And building permits, a gauge of future construction, rose 0.7 percent. The majority of those permits were for single-family homes. It can take 12 months for a builder to obtain a permit and construct a single-family home.
Single-family home construction rose in each of the final three months of last year, bringing the pace of those starts to the highest level since April 2010. The modest but steady gains helped boost confidence among builders after the worst year for single-family home construction on record.
"The upturn in permits and starts in recent months has been consistent with the surge in the ... survey of homebuilders, which has surprised the markets to the upside for five straight months," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "The new home sales numbers have not yet responded but builders seem confident that if they build, buyers will come."
The critical gauge of the housing market's health has a long way to go before most declare a full recovery is under way. The current pace is less than half the rate at which those homes went up during the 1990s. And it's only one-quarter of the 1.82 million single-family homes that builders started in January 2006, at the peak of the housing boom.
Most analysts say it could be years before the industry is fully recovered from the damage caused by the housing bust.
Builders are starting to see some signs of progress.
A measure of builder sentiment has risen for five straight months and is now at its highest level in nearly five years. Many builders are seeing more people express interest in buying a home, leading them to believe 2012 could be a turn-around year for the market. Mortgage rates have never been cheaper. And home sales started to rise at the end of last year.
Yet for all their optimism, builders began just 430,900 single-family homes last year. It was the fewest on records dating back a half-century. And home prices are still falling.
New Homes' Impact on the Economy
Though new homes represent just 20 percent of the overall home 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 taxes, according to the National Association of Home Builders.
Builders are struggling to compete with deeply discounted foreclosures and short sales -- when lenders allow homes to be sold for less than what's owed on the mortgage.
After previous recessions, housing accounted for at least 15 percent of U.S. economic growth. Since the recession officially ended in June 2009, it has contributed just 4 percent.
Another reason sales have fallen is that previously occupied homes have become 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 nearly twice the markup typical in a healthy housing market.
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