Construction Sector Pulling Brakes on Recovery
Historic low mortgage rates and the Federal Reserve’s “Operation Twist” triggered a rise in demand for new homes, home prices and existing home sales.
But, the construction industry’s struggle with job creation continues to add speed bumps to a faster housing market recovery, says a report by mortgage giant Freddie Mac.
“While housing may not have played its traditional role coming out of the Great Recession, at the end of the day, it has turned a very large corner and now it’s time to get this sector back to work whether through construction jobs, remodeling, or home brokerage,” said Frank Nothaft, Freddie Mac’s vice president and chief economist, according to a report.
Builders broke ground on 719,000 homes in the first five months of this year. That’s a 26 percent jump compared to the previous year. A telling sign that the market is healing with increasing demand. New home sales also showed positive gains in the same time period with sales up 17 percent when compared to a year ago. Despite that, job creation continues to lag in the construction sector. In the last year, overall payroll jobs increased 1.8 million, but construction jobs were up only 13,000.
Private Equity Company Buys Over 2,000 Foreclosed Homes
Private investment group Blackstone Group LP poured $300 million into the real estate market, buying up more than 2,000 foreclosed homes.
Blackstone’s strategy is to buy homes at huge discounts, rent them out for a while and resell them once the market turns around.
“Our bet is over time, vacant homes will fill up and markets will begin to recover,” Jonathan Gray, senior managing director and global head of real estate, told Reuters. “Our exit will be to sell the individual homes to the renters themselves, or there could be a very large market for public housing units.”
If more companies such as Blackstone follow similar strategy, the housing market could have an accelerated recovery. Foreclosures have been one of the biggest curses for the market, dragging home values and flooding the market with inventory. But, investment firms have been anxious about funneling money into the foreclosed segment of the housing market because of the costs involved with refurbishing and managing those properties.
Existing Home Sales Drop
Sales of previously occupied homes dropped 5.4 percent in June when compared to the previous month, signalling yet again that the recovery road is besieged with hurdles.
At a seasonally adjusted annual rate that’s 4.37 million homes, far below the 6 million-mark, which analysts consider the sign of a healthy market. According to the National Association of Realtors®, that’s the fewest number of homes sold since October. According to the Associated Press, industry experts are hoping it’s just a small slip and in no way indicative of another market downturn.
“It is only one month and the rest of the housing indicators have all continued to show improvement,” said Jennifer Lee, senior economist at BMO Capital Markets. “Let’s hope this June decline is a blip.”
The one hiccup is that the number of first-time buyers, a very important segment, declined in June, making up just 32 percent of all sales. On a positive note, median home prices climbed 5 percent to $189,400, and inventory of existing homes for sale dropped to 2.39 million.
Housing Starts Rise, but Building Permits Fall
Here’s a mixed bag of news from the Commerce Department. Privately owned building companies broke ground on more new homes in June when compared to the prior month. Housing starts rose 6.9 percent to a seasonally adjusted rate of 760,000 – that’s the highest since October 2008.
Economists were expecting numbers to be at 745,000, according to a news report. While this is good news, builders in June requested fewer permits to build new homes. Request for permits declined 3.7 percent to a seasonally adjusted rate of 755,000 compared to the previous month. Hopefully it’s just a anomaly. Building permits are indicative of the market’s direction in the near future. A decline in requests for permits could mean a slowdown in construction activity in the coming months.