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Home builders face long, bumpy road to recovery

The home building industry is back on the road to recovery, but it's going to be a long, bumpy ride.

The latest sign of just how bumpy came from government data Thursday showing that groundbreaking on new U.S. homes unexpectedly fell in July and gains from the prior month were revised lower. But permits to build new homes, a closely watched barometer of future activity, rose to the highest in well over three years

"(Housing is) bouncing along a bottom level,” said economist Gary Shilling, who heads an investment research firm. “This is still a very distressed industry.”

Though the pace of new construction has been slowly trending higher over the past year, the Commerce Department said on Thursday that housing starts dropped 1.1 percent last month to a seasonally adjusted annual rate of 746,000 units. That’s roughly a third of the pace of home building during the height of the housing boom in early. 2006. 

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Still, most housing analysts believe that – barring a fresh shock to the U.S. economy – the housing industry has hit bottom and is slowly rebuilding. Permits for new build homes rose 6.8 percent in July to an 812,000 unit annual pace, the highest rate since August, 2008.

Home builders are seeing strongest demand for multi-family units, which rose 9.6 percent in July form the month before. The boom in multi-family housing comes as ongoing high levels of foreclosures in some regions send families looking for rental units. Rental demand is also up as younger households decide to defer home ownership or can’t get credit.

Strong demand for rental properties has helped raise monthly rent prices at a healthy clip. Nationwide, rents were up 2.8 percent in July – twice the overall rate of inflation – a big attraction to investors loking to break ground on new apartment buildings.

Like everything to do with real estate, the demand for new homes varies considerably from one region to another.  The recovery is mainly taking place in the South and West, with the construction in t eh Northeast lagging the overall trend.

Home builders in areas hardest hit by foreclosures continue to struggle to find the bottom as bloated inventories of those distressed properties crowd out demand for new homes and weigh on prices.

"The continued flow of distressed inventory will limit the improvement in housing starts, but it doesn't stop the improvement in parts of the country where there is not a lot of distressed properties," said Michelle Meyer, an economist at Bank Of America Merrill Lynch.

Even in relatively healthy markets, though, it will be many years before the home building industry looks anything like normal. Despite the modest pickup in construction, home builders aren’t hiring. Overall employment for residential construction in July was 3 percent below the level year-ago

The hope is that the housing bust has built up a level of pent-up demand that will soon spur increases sales of new homes.

“Eventually, provided the economic recovery remains on track, the demographics will start to kick in,” said Patrick Newport, a housing economist with IHS Global Insight. “Household formation will accelerate (our population is growing by about 3 million a year), and many young adults now living with parents will start moving out.”

But Newport doesn’t expect to see housing starts climb above the 1.5 million threshold – roughly the average pace before the h housing bust - until 2015.

A lot will depend on how long it takes for home prices to recover, especially for the roughly one in five homeowners who owe more on their home than it’s worth. Those millions of underwater homeowners have substantially slowed both the “move up” market for growing families and the “move down” market for empty nest retirees looking to downsize. 

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