Tepid recovery continues to shadow housing

WASHINGTON - Builders erected fewer homes in October after a big surge the previous month, although analysts expected housing starts to rebound over the next few months.

Builders started construction at a seasonally adjusted annual rate of 1.009 million last month, the Commerce Department reported Wednesday. That was a drop of 2.8 percent from September when construction had jumped 7.8 percent to 1.038 million. The weakness stemmed from a 15.4 percent plunge in apartment construction, a category that tends to have big swings from month to month.

"The decline in housing starts in October was entirely driven by a fall in the volatile multi-family component," said Paul Diggle, an economist with Capital Economics, in a research note. "With single-family starts, building permits and homebuilder confidence all rising, the outlook is becoming increasingly positive."

Construction of single-family homes was up 4.2 percent, the third gain in the past four months. Applications for building permits, a good sign of future activity, rose 4.8 percent in October to 1.08 million.

While overall construction was down in October, analysts said the weakness was confined to apartment building, which had seen a huge increase in September. They noted upward revisions to overall activity in September and August and forecast further gains in the months ahead.

"The improving trend should continue, supported by generally low rates ... and strong job growth," said Jennifer Lee, senior economist at BMO Capital Markets.

Showing strength in October was the South, which posted a 10.1 percent jump on construction starts. All other regions of the country recorded declines. Construction fell 18.5 percent in the Midwest, 16.4 percent in the Northeast and 10.9 percent in the West.

Solid employment gains, lower mortgage rates and somewhat easier lending standards are likely to boost housing in coming months. At the same time, economists are concerned about price gains, which so far have been outpacing wage increases. Price increases have cut into affordability for would-be buyers, limiting sales growth for new homes and cutting into sales for existing homes.

Jim O'Sullivan, chief U.S. economist with High Frequency Economics, notes that the level of housing construction remains low, although it has doubled from as low as 500,000 new homes in 2009.

Tepid economic growth is also muting demand for new homes.

"After a surge in buying activity in mid-2013 sparked by the [Federal Reserve's] taper talk, demand slipped noticeably and has since been unable to recapture the highs of 2013," Lindsey Piegza, chief economist with investment bank Sterne Agee, said in a research note. "In the end, without jobs and income growth, consumers remain restrained, translating into positive, but modest demand."

But in an encouraging sign, U.S. homebuilders' confidence rebounded in November as both sales expectations and buyer traffic improved. The National Association of Home Builders/Wells Fargo index rose to 58 this month, up from 54 in October. That puts the index just short of September's reading of 59, which was the highest level since November 2005, shortly before the housing bubble burst. Readings above 50 indicate more builders view sales conditions as good rather than poor.