Housing Starts Rise In March

The U.S. Commerce Department reports housing starts rose 7.2 percent in March, but what it means for the housing market is not exactly encouraging. The increase follows an abysmal showing in snowy February.

Building permits were up 11.2 percent. Again, the numbers sound promising until you begin comparing them to what used to be considered normal. Despite the increase, home construction is still 14 percent below year-ago levels. Compared to the height of the market, in 2006, construction activity is down 76 percent.

“Home construction picked up solidly in March and activity should rise going forward.  That is the good news,” said economist Joel Naroff of Naroff Economic Advisors, in Holland, Pa. “The bad news is that we are at record lows for homes under construction and completions while the number of housing starts remains not that far from the record low set in 2009 during the depths of the recession.”

How it helps

Home construction is normally good for the overall economy. It creates jobs, first and foremost. It also uses building materials and requires the purchase of equipment.

But as the struggling housing market tries to work through its massive inventory, it’s far from clear that adding to that inventory is a good thing.

If most of the new homes were pre-sold, and were being built to the specifications of the buyer, new construction activity is a good thing. However, if most of the new construction was for “spec” homes, which will be sold once completed, that might not be such a good thing. With sluggish sales and foreclosures still depressing prices and adding to inventory, it’s hard to see how creating new, unsold houses helps anyone.

Still, Naroff says when it comes to growing the economy, every little bit helps. Even though housing is a much smaller part of the economy than it was a few years ago, construction activity has a beneficial effect on the economy as a whole, if not the housing market itself.

“It looks like housing will actually add to growth during the first quarter and that could ease the fears that growth could come in quite low,” Naroff said. “Looking forward, construction is likely to rise as we move through the spring given the strong rise in permit requests.”