U.S. builders started work on single-family houses last month at the fastest pace since the Great Recession began in late 2007.
Housing starts in August rose 0.2% to a seasonally adjusted annual rate of 1.21 million homes, the Commerce Department said Tuesday. Construction of single-family houses accounted for all of the gains, shooting up 12.8% last month to the highest rate since December 2007.
Fueled by steady job gains and low mortgage rates, total housing starts have risen 11.3% year-to-date. The market is attracting more buyers and renters, as starts for apartment buildings have climbed 12.2% this year, despite last month's drop.
But the report also showed the potential limits of new construction.
Approved building permits decreased 16.3% in July to an annual rate of 1.12 million, after achieving an eight-year high in June. The decrease likely reflects some pullback after months of gains and was caused primarily by a sharp plunge in permits to construct apartment complexes.
Homebuyers and renters have crowded into the housing market this year, pushing up prices to levels that have worsened affordability. Builders have relieved some of this financial pressure by ramping up construction, yet the increases in housing starts and building permits still lag behind the surging demand.
Purchases of new homes are 21.2% higher through the first six months of this year than the same period in 2014. Existing homes are selling at an annual rate of 5.49 million, the fastest pace since February 2007, according to the National Association of Realtors.
Consistent hiring gains and low mortgage rates have led to greater optimism among builders.
The National Association of Home Builders/Wells Fargo builder sentiment index released Monday reached 61 this month, up from 60 in July. Any reading above 50 signals expansion.
Still, only 5.4 months' supply of new homes is available, compared with six months in a healthy market. Construction of single-family houses has risen at roughly half the pace of sales growth for new homes.
In the rental sector, prices are increasing at double the rate of hourly wage growth largely because of fewer vacant apartments available. Home rental prices are up 4.3% in the past year, according to the real estate firm Zillow. Average hourly earnings have improved a mere 2.1%.
Developers are addressing the recent shift to rentals as more baby boomers start to downsize and millennials rent longer before buying their first homes.
The real estate firm Trulia found that permitting activity for apartment complexes has surged well above the historical average in many markets.
In the New York City metro area, building permits for multifamily complexes is an astounding 423% higher than the 24-year average. The increase is 295% in Boston, 138% in Philadelphia, 161% in Los Angeles, 102% in San Francisco and 114% in Houston.
"A lot of this has been in the works for a while," said Selma Hepp, chief economist at Trulia. "Builders plan well ahead — and so looking at the demographic trends they knew would be coming into full force, they wanted to take advantage of that."
The increased demand primarily reflects an economy operating from a stronger foundation of hiring as the recovery enters its seventh year.
Employers added 215,000 jobs in July, while the unemployment rate held at 5.3% for the second straight months. The economy has benefited from nearly 3 million new jobs in the past year, an influx of paychecks that has boosted the housing and construction sectors.