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New home construction rebounds in 2012

By Ylan Q. Mui,January 17, 2013

U.S. housing starts climbed 12.1 percent last month to a 954,000 annual…

New home construction has rebounded to levels not seen since the depths of the financial crisis, according to new government data, as what had once been a major drag on the economy now appears to be a bright spot.

The Census Bureau reported Thursday that new home construction rose 28 percent in 2012. That was capped by a roaring December in which the building of homes reached an annualized pace of 954,000.

And more new houses are on the way: Builders received permits for more than 800,000 units last year, up 30 percent from the previous year, government data shows.

“We think the recovery is real this time,” said Scott Anderson, chief economist for Bank of the West and head of the economic advisory committee of the American Bankers Association (ABA). “One of the bright spots in our forecast is the housing market. These are very strong numbers.”

The group said Thursday that it anticipates home prices will rise 4.3 percent this year, driven by rock-bottom mortgage rates, the tight supply of homes on the market and growing consumer confidence. A turnaround in housing is particularly significant because the sector was at the root of the nation’s financial crisis. Its return signals that a fundamental flaw in the economy may have been fixed.

In fact, many think the sector has already begun to help boost the nation’s output. Steady growth in home building has led to a rebound in construction hiring, allaying fears that workers who were laid off during the housing bust had become permanently unemployable.

“With inventories of new homes at razor thin levels, builders are moving prudently to break ground on new construction ahead of the spring buying season to meet increasing demand,” said Barry Rutenberg, chairman of the National Association of Home Builders and a home builder from Gainesville, Fla.

Perhaps just as important is the impact home prices have on consumers’ budgets. For many families, their home is their largest investment, and the housing crash robbed them of financial security. Now, as home values inch upward, consumers may be more inclined to open their wallets again.

“Rising home prices create a wealth effect that’s critical to supporting consumer spending and economic expansion,” Anderson said.

Yet despite the gains, the pace of home construction remains about half the rate it was during the boom years. Anderson said housing starts could jump by double-digits each month for five years and still not return to pre-recession levels.

In addition, some of the sector’s year-end gains could be attributed to technical considerations, such as higher permitting fees and new regulations taking effect this year, according to Wells Fargo economist Mark Vitner.

“The overall report is somewhat too good to be true,” he wrote in a client note. But, he added, “While the bump in starts appears a bit exaggerated, the trend is still upward.”

Economists also cautioned that momentum in the housing market and the broader economy could be stymied by the debate in Washington over the debt ceiling and the looming across-the-board federal spending cuts.

The ABA’s economic advisory committee, made up of 13 economists at the nation’s biggest banks, predicted that tax increases alone would lower the gross domestic product by 1.25 percent. Economic growth could slow even more if lawmakers cannot reach a compromise over the federal budget and spending. The group also estimated there is a 23 percent chance that the country would fall back into recession this year.

“If you double down on austerity this year, you’re flirting with recession,” Anderson said.