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Is New Home Construction Slowing Down?

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Is New Home Construction Slowing Down?

It's amazing how quickly things can change in the home construction business!  Last month, the National Association of Home Builders (NAHB) reported that builder confidence was at its highest level since April 2006, and they had plenty of reasons to be happy. After all, research showed that private residential home construction companies saw an average sales increase of 3.6% from December 2011 to December 2012. The number of houses built in 2012 was the highest it had been in 4 years, and the Department of Housing and Urban Development (HUD) reported that single-family home starts posted double-digit increases in month-to-month and year-to-year comparisons.

But recently released statistics from the U.S. Commerce Department show that perhaps the excitement over the housing industry's turnaround was premature. Housing starts fell 8.5% in January after surging 15.7% in December. The Commerce report said new-home construction totaled a seasonally-adjusted rate of 890,000 last month, after jumping to 973,000 the month before. Despite the drop-off, January's pace was still the 3rd-highest since 2008.

Economists and members of the NAHB were disappointed with the statistics, hoping that January would continue the upward trend and contribute towards recovery for the housing market.

Even more importantly, the new figures affected builder confidence. The NAHB reported last week that the sentiment index dropped to 46 in February.  Readings below 50 indicate that a majority of builders polled have negative feelings about the housing industry. (Although this was the first monthly drop since last April, builders are still happier now than they were in October 2011, when the index was a 17!)

So, does this mean that builders got ahead of themselves and started construction on too many new homes? Analysts say, “not necessarily!”

It wasn't all doom and gloom in the Commerce Department report, though. In fact, there was plenty of encouraging news, too, leading many analysts to say they are still expecting the housing market to rebound from the recession. The pace of construction of single-family homes rose 0.8% in January, and the number of new permits to build a home also showed improvement. They totaled 925,000 at an annual rate last month, up 1.8% from December's 909,000, which had been the highest total for permits since mid-2008.

Home prices for previously-occupied homes continue to rise, while the inventory of homes on the market is at its lowest level in nearly 10 years. There are fewer low-priced foreclosures available now as well, so many prospective buyers are considering purchasing a newly-constructed home instead of trying to outbid other buyers for previously-owned homes.

And, thanks to historically low-interest rates, more Americans who are currently renting are considering purchasing a home.  Remember, sales of new homes jumped 20% in 2012, and economists expect a similar increase this year.

Although they don't anticipate the housing market to make a full recovery until 2015, leaders at the NAHB say even these slight increases of new home constructions and sales help the economy. They claim each new home built creates an average of three jobs for a year and generates $90,000 in tax revenue.

So, while January's numbers weren't as encouraging as many had anticipated, it seems that the housing market – and the new home construction market – is still headed in the right direction.


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