Construction surprisingly up 10.5%

Construction activity across the nation jumped unexpectedly in August, a sign that while the housing market is still far from recovery, it hasn't totally collapsed.

The report, released Tuesday by the U.S. Commerce Department, showed housing starts nationwide rose 10.5 percent during August, with much of the increase coming from new apartment buildings, to an annualized rate of 598,000. But construction of single-family houses increased, too, rising 4.2 percent from July -- the first month-to-month increase since April for single-family housing, but still lower than a year ago.

Though analysts were surprised by the size of the increase (they expected starts to drop to 535,000), the one-month report isn't enough to signal the beginning of a recovery -- that'll come only after the employment picture improves. Still, the numbers reflect a market trying to find its bottom, which hasn't happened yet, and is particularly difficult to identify right now. That's especially true after the April 30 expiration of the federal home buyer's tax credit, which temporarily boosted sales of both new and existing houses. The report doesn't track sale prices, which have been under heavy downward pressure because many builders have discounted prices to liquidate unsold inventory.

A number of indicators suggest a full-on recovery is still several months away. Building permits, a reflection of future construction activity (builders can pull a permit, but not start construction until several months later), have largely remained flat nationwide, falling 1.2 percent.

And a National Association of Home Builders/Wells Fargo Housing Market Index released Monday showed builders' sentiment and sales activity remained near record lows.

Those who responded to the survey say two indicators -- jobs and foreclosures -- stand in the way of a better market. That's why Wells Fargo Securities senior economist Mark Vitner doesn't expect better numbers until early next year.

"It really looks like we're stuck here at the bottom," he said.

Vitner said he expects a turnaround next spring as new jobs are added to the economy, but warned the monthly sales numbers could be particularly volatile over the next several months, especially because there's been modest improvement in multi-family construction. A single apartment building can heavily influence one month's numbers when the numbers are already so low.

"It doesn't take much to move the needle when starts are this low," Vitner said. "So we're likely to get some quirky numbers, even through most builders I talk with say they're not doing much."

The numbers can also be influenced by the weather, because starts are counted when building materials are delivered to a job site and foundations are built. That will happen sporadically as weather allows.

Locally, construction activity has fallen in the Twin Cities metro area considerably this year, but the year-over-year comparisons have remained fairly stable because of several new rental apartment projects. For example, during August the number of planned units was down 15 percent, but was up 73 percent compared with July 2010, according to the Builders Association of the Twin Cities. And from January through August permit activity was 29 percent higher than in 2009. The September report will be issued next week.

In a report on the local numbers, Gary Aulik, president of the Builders Association of the Twin Cities, said the Twin Cities has fared slightly better than the rest of the nation in large part because the unemployment rate here has been slightly better than the national average.