Staff Report
Published Oct. 30, 2012

Overall economic growth continues to putter along at around a 2% pace, as businesses remain reluctant to commit to major capital investments or hire new workers in a significant way, according to economists with Wells Fargo Securities.

Economic growth in the third quarter was largely supported by continued gains in consumer spending and a rebound in defense spending. With the “fiscal cliff” nearing and manufacturing activity slowing in response to slower global economic growth, expectations for economic growth for the coming year have been reduced even further.

Meanwhile, home sales and residential construction are expected to increase, senior economists Mark Vitner and Anika Khan wrote in an outlook statement.

The divergence between overall economic growth and housing is possible due to the magnitude of the housing bust, the economists said, which saw residential construction activity tumble from a peak of 6.3% of GDP in the fourth quarter of 2005 to just 2.5% in the third quarter of 2012.

“With housing activity accounting for such a small portion of overall GDP, even the 16% rise in housing starts we are now projecting for 2013 is not enough to move the needle in a meaningful way, particularly with exports slowing, government spending contracting and taxes increasing,” the report said.

New homes now face less effective competition from foreclosures, the economists added.

“With many of the best properties already sold, distressed transactions are now accounting for a smaller share of overall sales. The drop in competition from foreclosures has bolstered builder confidence,” the economists said.

The economists raised their forecast for new-home sales and housing starts in 2013 and 2014 due to recent reports from homebuilders, strong gains in building permits and starts, record low new-home inventories, and the Fed’s stated intentions to purchase large quantities of mortgage-backed securities on an ongoing basis.

September’s housing starts surged 15%. For the first nine months of the year, housing starts are running 26.6% ahead of the first nine months of September 2011. Single-family starts are up 23.5%, while multifamily starts are up 34.7%.

However, the economists warned, the significant jump in housing starts last month may exaggerate the extent of the improvement in new-home construction.

“Starts tend to bounce around quite a bit and it is not uncommon to see large revisions to previous months’ data,” they said. “We are also headed into the seasonally slow months, in which the seasonally adjusted numbers can show wide swings on relatively small changes in actual activity. These swings tend to be amplified by weather conditions.”

With the Fed committed to purchasing mortgages and keeping interest rates low, builders should be slightly more confident about building inventory going into the key spring selling season, and builders have better access to credit today than at any time since the building boom ended. The recent strength in the apartment market is another factor that should keep homebuilding humming in 2013, the economists said.