A trifecta of good economic news last week could be a sign the U.S. might elude the slowdown that is making its way across the globe.
First, the Census Bureau reported that home builders started 6.3% more homes in September than in August, welcome news after a disappointing dip in housing starts the month before.
Then, the University of Michigan chimed in with its finding that consumer confidence—a measure of how optimistic Americans are about the near future of the U.S. economy—rose in October to its second-highest level in seven years.
Third, 30-year mortgage rates dipped below 4% for the first time in 16 months.
And just a few weeks earlier, the Bureau of Labor Statistics announced that the unemployment rate fell to below 6% in September for the first time in six years, and not because frustrated job-hunters gave up the search. Employers added 248,000 jobs.
Combined, economist Gus Faucher, of PNC Financial Services Group in Pittsburgh, told Bloomberg, “The fundamentals continue to look solid. The turmoil in the market doesn’t reflect the underlying U.S. economic fundamentals.”
Reversal of fortunes
That housing starts ballooned wasn’t the only surprise from a joint report by the Census Bureau and the Department of Housing and Urban Development. The other one: While builders broke ground on 1.1% more single-family homes in September than in August, it was work on new apartment buildings that pushed the rate of housing starts over the top.
Starts on buildings with five or more units skyrocketed by 18.5% in September, after a sizeable drop in August.
In fact, home construction declined steeply in August, led by a 31.7% downward spiral in apartment construction.
Just a month later, the combined upward boost in single-and multifamily building brought housing starts to a seasonally adjusted annual rate of 1.017 million homes, according to the government report.
Allure of apartments
Over the past year, apartment construction has surged 30.3%, while single-family starts have gained 11%, according to the Census Bureau.
Reasons for the great divide: First, money. The typical, 20-something first-time home buyer is shying away from homeownership because of a slower-than-expected economic recovery, paltry growth in wages, historic levels of college debt, meager job prospects, and a tight credit market that makes onerous work out of qualifying for a mortgage, especially for entry-level home buyers. And although housing prices have been leveling off, values are still rising, putting single-family homeownership out of reach for many young, would-be buyers.
Second, the apartment lifestyle, with its short leases, low maintenance and built-in social opportunities, seems to appeal to today’s young adults, who also are putting off car ownership and marriage.
The result: Even though builders have created twice as many apartment units as single-family homes so far this year, they can’t build them fast enough to keep up with demand from ownership-averse young tenants.
"That's where demand is," Jed Kolko, chief economist for the real estate website Trulia, told the Los Angeles Times. "Nearly all of new household formation right now is renters. Young people are starting to move out of their parents' homes, and both young and older adults are having a hard time buying houses."
Kolko, like most economists, has said demand will continue to grow as more millennials opt for apartment life instead of the traditional American dream.
Predictor of future
Economists also have predicted that demand for single-family homes will grow, but perhaps not as aggressively as that for apartments.
Indeed, the Census report indicated that applications for building permits increased 1.5% September—an indication that housing starts in coming months will remain in the black. Permits for multifamily buildings rose 7% last month.
More reasons for optimism, according to economists and housing analysts:
- A 3.97% mortgage rate—the lowest in more than a year—could spur home sales by next spring.
- The rise in housing starts boosted investors’ confidence across the board on Friday after the Census Bureau’s announcement. Stocks were up 1.5% in afternoon trading, despite concerns about Ebola and the weakening global economy.
- Homebuilders KB Home, PulteGroup and Lennar Corp. had a good day on Wall Street Friday following the Census Bureau announcement. Over the past few weeks, analysts had downgraded many homebuilder stocks.
Measure of caution
Still, not everyone is elated over last week’s spate of positive economic news.
“While the residential real estate market has definitely gotten better, which is good for the U.S. economy, it has not fully recovered,” Wells Fargo CEO John Stumpf told reporters last week.
In fact, he noted, the housing recovery has some obstacles ahead, including fewer new household formations, record amounts of student debt and a tight credit market.
Sterne Agee chief economist Lindsey Piegza told Consumer Affairs, a consumer news and advocacy organization, that last week’s housing numbers are a high point in a year of uneven demand, which is “likely to keep home builders cautious for some time, despite the fact that industry confidence is on the rise, thanks to relative improvement in conditions compared to weakness at the start of the year.”