New-home construction in the U.S. surged to an eight-month high in July, lifting the stock market and prospects for a broader economic recovery.
Housing starts jumped 15.7% from June to a seasonally adjusted annual rate of 1,093,000, the Commerce Department said Tuesday. Investors cheered the rise, which ended two months of declines and soared past expectations of a 965,000 rate.
Emboldened by the housing numbers, the Dow Jones industrial average rose 80.85 points to close at 16,919.59.
"This was a solid report," IHS Global Insight economists Patrick Newport and Stephanie Karol wrote in an analysis. "Builders' optimism is picking up."
If it continues, the uptick in construction could have sustained, broad effects on the economy. New-home construction wields a hefty economic punch, economists say. Builders demand scores of laborers and raw materials, while new-home buyers often furnish their digs with new couches and televisions.
That bodes well for companies that specialize in construction materials and home improvement.
Home Depot Inc., for instance, said Tuesday that its second-quarter profit jumped 14% to $2.05 billion, or $1.52 a share, from $1.8 billion, or $1.24, a year earlier.
The company, based in Atlanta, also raised its profit outlook for the year. Shares of the home improvement giant rose $4.64, or 6%, to $88.23.
But, much like the larger economy, the housing market has had its share of fits and starts.
The recovery slowed starting last summer as higher prices and mortgage rates priced some buyers out of the market. Sales of previously owned homes, the largest portion of the market, have risen in recent months but remain below year-ago levels. New-home sales fell in June from May, as well as from a year earlier.
In a speech last week, Federal Reserve Vice Chairman Stanley Fischer labeled the housing market a major roadblock to a more robust economic recovery.
Tuesday's construction report, however, should lessen such concerns, Credit Suisse economist Dana Saporta said. Building permits, a gauge of future construction, climbed 8.1% in July.
"Looking forward, a case could be made for continued improvement in the housing sector," said Saporta, pointing to rising optimism from home builders and an improving labor market.
July was the sixth straight month that the U.S. added more than 200,000 net new jobs — a streak not seen since 1997. And a gauge of builder confidence hit a seven-month high in August, the National Assn. of Home Builders reported Monday. The association said mortgage rates that have fallen from last year's highs are one factor driving buyers to new homes.
"More and more people are feeling ready to buy a home," said Kevin Kelly, the group's chairman.
The monthly Commerce Department report showed new-home construction climbed in all regions except the Midwest, where starts fell 24.8%. In the West, a major home building region, starts rose 18.6% in July from a month earlier. June's dismal national numbers were also revised upward to 945,000 from 893,000.
Still, groundbreaking remains off its normal pace from before the housing bubble, when starts averaged around 1.5 million annually, Saporta said.
Across Southern California, new-home sales this year will rise 5% to 19,100, predicts Pete Reeb, an economist with John Burns Real Estate Consulting in Irvine. That, however, is still 53% below the 25-year average.
Sluggish demand from first-time home buyers, along with a shortage of skilled construction workers and ready-to-build lots, has held back construction, said chief economist David Crowe of the home builder association.
In addition, last decade's crash wiped out many smaller builders, as well as the financing sources they and others relied on.
Since the recovery began, new construction has largely taken place in more expensive, highly sought-after locations, said Brad Hunter, chief economist at researcher Metrostudy. Builders are wary of constructing large developments in suburban fringes where first-time home buyers often look for affordable homes, he said.
In a conference call with analysts Tuesday, Home Depot Chief Executive Frank Blake acknowledged the mixed housing reports, but said the company believes the housing market remains a "modest tail wind for our business."
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