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US housing starts a bright spot for cooling economy

Groundbreaking on new US homes rose in June to its fastest pace in over three years, lending a helping hand to an economy that has shown worrisome signs of cooling.

india Updated: Jul 18, 2012 20:21 IST

Groundbreaking on new US homes rose in June to its fastest pace in over three years, lending a helping hand to an economy that has shown worrisome signs of cooling.

The Commerce Department said on Wednesday that housing starts rose 6.9% last month to a seasonally adjusted annual rate of 760,000 units. That was the highest rate since October 2008.

"Housing is clearly in recovery mode, although the sector is much less important than it used to be," said Jim O'Sullivan, an economist at High Frequency Economics in Valhalla, New York.

The housing market, which began to collapse six years ago, has been a relative bright spot in the economy this year, although it remains hobbled by a glut of unsold homes. But since it makes up a smaller share of the economy than before the 2007-2009 recession, it can provide only a limited lift to the broader recovery.

On Wednesday, the Mortgage Bankers Association said applications for U.S. home mortgages jumped last week on a surge in demand for refinancing as the interest rate on 30-year mortgages fell to a record low.

In recent weeks, other data has shown signed contracts for home purchases rose sharply in May and rising home prices.

"Housing continues to be the one sector of the U.S. economy that is outperforming expectations," said Michael Gapen an economist at Barclays in New York.
Housing starts in June were above the median forecast in a Reuters poll of a 745,000-unit rate.

Revisions to data on housing starts from prior months were also upbeat. Groundbreaking during May was revised up to a 711,000 unit pace from a previously reported 708,000 unit rate. April's reading was also revised slightly higher.

Still, the broader U.S. economy has looked much more wobbly of late, and if the recovery fails and the country tips back into recession, housing also would suffer.

In a cautionary sign for momentum in the housing sector, new permits for building homes dropped 3.7 percent in June to a 755,000 unit pace.
US stocks were higher in early trading, led by technology companies. The U.S. 30-year bond yields fell as safe haven demand for bonds persisted despite the housing data.

In congressional testimony on Tuesday, Federal Reserve Chairman Ben Bernanke said the US economic recovery was being held back by anxiety over Europe's debt crisis and the path of US fiscal policy.

Planned belt tightening by the US government in 2013 would send the country into recession, he said.

While Bernanke offered few new clues about whether the US central bank was moving closer to a fresh round of monetary stimulus, he said policymakers meeting later this month would be looking closely for signs of any stall in the recovery of the labor market.

Bernanke will speak to lawmakers again on Wednesday.

The pace of hiring in the United States slowed sharply in the second quarter, as did growth in factory output. Retail sales have also flagged in recent months.
The Commerce Department's report showed the increase in housing starts in June was spread broadly throughout the sector, with groundbreaking for single-family homes up 4.7%. This segment accounts for most of the market. Starts for multi-family homes - one of the report's more volatile readings - rose 12.8%.