Groundbreaking for new U.S. homes jumped in August to a four-month high, a tentative sign of stability in the housing market after steep declines brought by the end of a homebuyer tax credit.
While the data on Tuesday further allayed fears that the recovery from the worst recession since the Great Depression was at risk, the Federal Reserve took a step toward a new round of monetary easing to stimulate growth.
In a statement at the end of a one-day meeting, the U.S. central bank said its policy-setting committee is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.
The most likely outcome is they will begin an incremental easing program starting at the November meeting, said Zack Pandl, a U.S. economist at Nomura Securities International in New York. The committee has a lot of discomfort about the rate of growth in the economy.
Housing starts rose 10.5 percent, the largest increase since November, to an annual rate of 598,000 units, the Commerce Department said. Financial markets had looked for a rise to just a 550,000-unit rate.
Stocks on Wall Street and prices for government bonds rose as investors welcomed the Fed's bias toward further easing of monetary policy. The dollar fell against the yen and the euro.
Construction was bolstered by a big jump in activity in the volatile multi-family segment, which increased by nearly a third to an annual rate of 160,000 units in August. Single-family starts increased 4.3 percent to a 438,000-unit pace, the highest since June.
Analysts are concerned that most of the gains are coming from the multi-family segment, a smaller portion of the housing market, and see only a very weak recovery.
The housing market has hit a soft patch following the end of a popular homebuyer tax credit in April and a survey on Monday showed sentiment among home builders remained mired at an 18-month low in September.
Although the recession ended in June last year, the unemployment rate is at a stubbornly high 9.6 percent, and there is an oversupply of homes on the market.
It is reasonable to believe that the post-tax credit plunge in housing activity, both sales and construction, is over, but we do not expect to see a strong recovery any time soon, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
Activity will likely creep higher as great affordability pulls people into the market, but that's about the best we can hope for in the foreseeable future.
Last month, new building permits for future home construction rebounded 1.8 percent to a 569,000-unit pace, lifted by a 9.8 percent rise in permits for multi-family units. Analysts had expected a 560,000-unit pace.
(Additional reporting by Rodrigo Campos in New York; Editing by Andrea Ricci)