Home Construction and Permits Rise

In the slow recovery of the housing market, any good news is welcome. That's why it was with considerable relief that the home construction market reported a considerable rise in both construction permits being granted and overall housing starts for August 2013. The rise in construction permits represents a 3 percent gain, while the number of new home construction starts came in at an annualized 628,000 home construction starts. This number is somewhat less than the over 900,000 that economists had projected, and this can be understood in the context of single-family versus multiple home construction.

Any rise in new home construction is good news. According to most economists, each new housing start represents three jobs that will last for an entire year. These jobs drive demand in a consumer economy, providing liquidity and encouraging still more home construction. This trend works against the somewhat higher interest rates mortgage lenders have been charging in anticipation of the Federal Reserve scaling back the bond stimulus program.

That stimulus program, in which the Federal Reserve expands the money supply via a backchannel known as quantitative easing, is a very expensive way to increase liquidity in the bond market. The fact that a mortgage is a kind of bond, floated by the homebuyer and held by the lender, has encouraged the historically low rates that have been common for several years. These low rates have artificially inflated the market for new home construction, and the demand was expected to slacken with the news that the stimulus would be discontinued. The fact that the expected bad news was greeted with only a 1 percent rate hike leads many to believe that the housing market's growth is now being driven by real demand. Other numbers, specifically in rental housing starts, bear this out.

Multi-unit construction is down from the economists' projections for the third quarter of 2013. The standard explanation for this is that the slight increase in interest rates has had the effect of discouraging developers from taking on potentially risky projects, such as the building of new apartment complexes. The potential difficulty in turning a profit with the thinner margins that lenders will permit has been seen as encouraging much of the new home construction that has been going on during the summer.

The housing market is an outstanding index of more general economic trends. While it represents only a tiny fraction of the overall GDP, the decision to invest in home construction is not undertaken lightly. That developers are willing to risk sizable sums, even when facing an uncertain lending future, speaks strongly of the potential gains that are yet to be made in the home construction sector. It's possible that these numbers will only improve as the economy recovers.

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