Could housing pull the U.S. out of recession?

Housing starts surged 22.6% in July, while building permits jumped 18.8% in the month, leading economists to suggest the sector could help the economy pull out of the coronavirus-related recession.

Starts soared to a seasonally adjusted 1.496 million annual rate from a revised June pace of 1.220 million, according to the Commerce Department. Year-over-year starts are up 23.4% from the 1.212 million pace in July 2019.

Permits increased to a seasonally adjusted 1.495 million annual rate from June’s unrevised 1.258 million pace, and are 9.4% above the July 2019 level of 1.366 million.

Economists surveyed by IFR Markets expected 1.237 million starts and 1.313 million permits in the month.

“Housing as a share of GDP came in at the highest level since 2007 during the second quarter,” said Yelena Maleyev, associate economist at Grant Thornton. “Much of that can be attributed to the composition: Housing was stable while other spending was down significantly."

And the good times should continue. "We expect housing to ride a wave into the fourth quarter, which could prove even stronger," she added. "That is assuming that the federal aid needed for millions of households comes through soon. It is worth repeating that the housing market could be the driver out of this recession, with the necessary support.”

The gains brought construction back near pre-pandemic first-quarter levels, said National Association of Realtors chief economist Lawrence Yun. “Such growth is needed to steadily relieve the housing shortage and this kind of growth is also a major contributor to local economic recovery,” he said. “The rise of single-family units is welcome, as overall inventory of homes for sale are down by 19% from one year ago and there is intense buyer competition in the market as a result.”

Despite the positives, Yun noted, the West region still suffers from inventory shortages and "construction is not rising" there.

"Overall, the numbers are good," he said, "although many more months of such trends are needed."

“Historically low" mortgage rates, which make housing more affordable is “driving housing demand,” according to Roiana Reid, U.S. economist at Berenberg Capital Markets. “Mortgage applications for home purchases which started to rebound in mid-April — earlier than most other indicators — are now up 21% year-over-year,” she said.

Mike Fratantoni, senior vice president and chief economist for the Mortgage Bankers Association, said the rise in starts and permits “lines up” with other recent building news. “Homebuyer demand remains robust, inventories are tight, and there is a need for new units to keep the pace of sales going,” he said. “On another positive note, housing permits were running at an even faster pace in July, indicating that builders will continue to increase production in the months ahead. Housing is certainly one of the bright spots in the struggling economy.”

Business leaders survey
New York service sector activity “declined significantly” in August, according to the Federal Reserve Bank of New York's Business Leaders Survey, released Tuesday.

The business activity index fell to negative 17.1 in August from negative 1.8 in July, the business climate index narrowed slightly to negative 74.1 from negative 75.4, suggesting respondents see the business climate as worse than usual. The number of employees index increased to negative 14.2 from negative 21.1, the wages index rose to 2.8 from 0.4, the prices paid index gained to 28.0 from 20.4, the prices received index climbed to negative 3.7 from negative 7.9, and the capital spending index slid to negative 27.3 from negative 26.1.

The future business activity index reversed to negative 2.8 in August from positive 7.1 in July, the future business climate index fell to negative 20.4 from negative 8.3, suggesting firms see conditions worsening in the next half year. The number of employees index decreased to 1.4 from 6.8, the wages index slipped to 5.6 from 7.2, the prices paid index rose to 30.5 from 25.8, the prices received index dipped to 3.4 from 3.7, and the capital spending index dropped to negative 19.4 from negative 15.3.

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