Don Ryan  /  AP
Construction underway on a new home in Beaverton, Ore.
updated 6/16/2011 11:25:40 AM ET 2011-06-16T15:25:40

Builders broke ground on more new homes in May, but not enough to signal a recovery in the troubled housing market.

Home construction rose 3.5 percent from April to a seasonally adjusted annual rate of 560,000 units per year, the Commerce Department said Thursday.

Economists say the pace of construction is far below the 1.2 million homes per year that must be built to sustain a healthy housing market. Many credit-strapped builders are struggling to compete with low-priced foreclosures.

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Housing permits, a gauge of future construction, rose last month to the highest level since December. But apartment and condominium construction accounted for a large portion of that increase. Renting has become a preferred option for many Americans who lost their jobs in the recession and who were forced to leave their rapidly depreciating homes.

Permits for buildings with five or more housing units jumped to its highest point since October 2008, well before a second wave of foreclosures knocked home prices down further.

Story: Renters are next victims of the housing market

The number of single-family homes started in May rose a modest 3.7 percent. But the construction pace of single-family homes, which accounts for about 80 percent of all residential construction, is well below the 2010 rate.

Construction of those traditional homes is "still very much dead in the water," said Mark Vitner, senior economist at Wells Fargo.

Though new homes represent a small fraction of the overall housing market, they have an outsize impact on the economy. Each home built generates, on average, three jobs and $90,000 in taxes, according to the National Association of Home Builders.

And single-family home purchases ultimately contribute more to the broader economy than apartment sales do. That's because buyers of single-family homes tend to spend more on furnishings, appliances, landscaping and other home improvements. They are also more likely to move up to bigger and more expensive homes later.

Apartments typically end up being occupied more often by renters, who spend less on their homes

But single-family home construction has been floundering. The last two years were the worst for housing starts on records going back to 1959.

Flooding and tornadoes across large portions of the Midwest and South delayed construction this spring, economists said. But even so, any rebound in the coming months will be modest, said Paul Dales, senior U.S. economist at Capital Economics.

Foreclosures and falling home prices have made re-sales more attractive. The median price of a new home is about 34 percent higher than the median price for a re-sale. That's more than twice the markup in healthy housing markets.

"The high premium is expected to continue to sway potential buyers to existing homes and away from new ones," said Christos Shiamptanis, economist at TD Economics.

In some cities, prices are half of what they were before the housing market collapsed in 2006 and 2007. Tougher lending standards have made home loans hard to come by. Many would-be buyers who could qualify for loans are worried prices will fall further. Others are reluctant to put their own homes up for sale when prices are dropping.

Home building was uneven across the country: It fell 3.3 and 4.1 percent last month in the Northeast and Midwest, respectively, but rose 1.5 percent and 18.1 percent in the South and West. The big gains in the West were largely due to increased apartment construction.

Few people think it makes sense to put their home on the market in this environment. Roughly 92 percent of homeowners say it's a bad time to sell, according to the latest Thomson Reuters/University of Michigan index of consumer sentiment.

The homebuilders' trade group said Wednesday that its survey of builder sentiment fell to 13 — the lowest level since September. Any reading below 50 indicates negative sentiment about the market. The index hasn't reached that level since April 2006.

Builders are not hopeful for a turnaround this year. An index that gauges sales expectations over the next six months fell in June to its lowest level on records dating back to 1985.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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