Pace of US home construction likely increased in May, providing support for economic growth

WASHINGTON – U.S. home construction has risen steadily in the past year, fueled by more buyers and a scarcity of houses for sale.

An increase in permits and growing confidence among builders suggest the pace of construction strengthened in May, providing more support for economic growth.

The Commerce Department will report on May housing starts and permits at 8:30 a.m. EST Tuesday.

In April, builders started work at a seasonally adjusted annual rate of 853,000. That was down from March, when the pace topped the 1 million mark for the first time in five years.

Still, most of the decline was in apartment construction, which tends to vary sharply from month to month. And the pace of home construction was still 13.1 per cent higher than in April 2012.

At the same time, applications for building permits, a gauge of future construction, rose 14.3 per cent in April to a rate of 1.02 million. That was the most since June 2008 and suggested builders would step up homebuilding in the coming months.

The housing recovery appears to be sustainable and is helping the economy grow, offsetting some of the drag this year from higher taxes and federal spending cuts.

Steady job growth and low mortgage rates have encouraged more people to buy homes. The increased demand, along with a tight supply of homes for sale, has pushed home prices higher. That’s also made builders more optimistic about the market for newly built homes, leading to more construction and jobs.

The National Association of Home Builders/Wells Fargo builder sentiment index released Monday rose to 52 this month, up from 44 in May. That was the highest reading in seven years and the largest monthly increase in more than a decade.

A reading above 50 indicates more builders view sales conditions as good, rather than poor.

Many of the nation’s major homebuilders have reported strong annual growth in sales during the spring home-selling season. The increased demand has paved the way for builders to raise prices and ramp up construction of more homes, despite lingering concerns over rising costs for land, building materials and labour.

Though new homes represent only a fraction of the housing 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 tax revenue, according to NAHB statistics.

The overall economy grew at an annual rate of 2.4 per cent in the January-March quarter. Analysts believe growth has slipped to about 2 per cent or less in the current April-June quarter, reflecting the government cuts and higher taxes. But many expect growth will pick up again in the second half of the year.

Residential construction contributed to economic growth last year for the first time in five years. Many economists predict housing will strengthen this year.