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After a harsh winter, the nation’s modest housing recovery appears to be back on track.
Home construction increased sharply in July, the Commerce Department reported on Tuesday, as Home Depot, whose fate is tied closely to the housing market, announced a strong quarter.
The government said housing starts last month were up nearly 16 percent over June, and almost 22 percent over 12 months ago.
For Home Depot, the country’s largest home improvement retailer, the uptick in demand gave second-quarter earnings a lift. Big-ticket purchases, like appliances, windows and water heaters, increased. The company also reported strong growth among its high-spending professional clients — which indicates that they have work.
“We believe, in many ways, it’s because of housing, and the fact that housing, while not as robust as last year, continues to recover,” Carol B. Tomé, Home Depot’s chief financial officer, said of the company’s strong results.
Though Tuesday’s numbers from both the government and Home Depot were each higher than analysts anticipated, economists did not expect to see similar types of surges in housing in the months to come.
Housing Construction
New private housing starts and permits authorized during the month, at a seasonally adjusted annual pace.
JULY
Starts
Permits
1,093,000
1,052,000
1.2 million
0.8
0.4
0
’13
’14
Some of July’s gains reported by the Commerce Department were in the South, a huge market that showed improvement in both single and multifamily construction after drying out from an exceptionally rainy and muddy spring. Other bright spots in Tuesday’s report were in the multifamily sector, but economists regard those month-to-month numbers as volatile.
Last month’s housing starts were at an annual rate of 1.093 million units, the highest reading since November. Single-family housing starts in July increased 8.3 percent over the revised June figure of 606,000, and were at a rate of 656,000. The July rate for multifamily housing was 423,000, showing the strongest level of starts since 2006.
In another positive sign, July applications for building permits, which foreshadow construction plans for future, were up 8.1 percent over the previous month.
Most analysts viewed July’s big leap as having little impact on overall trends in housing, where price increases are slowing down.
“With the stock of homes for sale well above its cycle lows, price gains slowing and new-home sales flat, it is hard to see why construction would keep rising,” Ian Shepherdson, chief economist of Pantheon Macroeconomics, said in a note to clients.
Several major factors are holding up the housing recovery. Household formation is almost flat, and well below the 50-year average, said Tom Showalter, chief analytics officer at Digital Risk, which provides mortgage services and risk analytics to lenders. Also, wage growth, which drives housing prices, is still sluggish.
A growing economy and improvements in the job market must continue to keep the housing market on track, Mr. Showalter said. He expects home price appreciation to level off and potentially become negative by the end of the year.
“We’re getting some increased demand, so that’s very good,” Mr. Showalter said. “The question is, Can the economy sustain the demand? And that’s a big if.”
At Home Depot, sales in the second quarter increased 5.7 percent, to $23.8 billion, from $22.5 billion in the period a year earlier. The company’s earnings were $2.05 billion, or $1.52 a share, which exceeded analysts’ expectations and were up from $1.8 billion, or $1.24 a share, in the second quarter of 2013.
The most crucial housing metric to home improvement retailers is home price appreciation, Ms. Tomé said. When people see their home as an investment, she said, they are more likely to spend money on it than if they see their home as an expense. So as home values rise and people see more equity in their home, they are more likely to spend money to spruce it up.
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While home price appreciation growth is lower than it was last year, Ms. Tomé said, “It’s still good news; it’s still headed in the right direction.”
The company said it now expected diluted earnings per share to be up about 20.2 percent, to $4.52 for the year. Its previous guidance was $4.42.
The good news comes at a crucial time of the year for Home Depot as spring is the most important selling season for home improvement retailers. Those warming months are when consumers head into the garden to tend their flowers or go up on a ladder to patch the roof or replace the windows. But weather can be a big factor in a consumer’s decision to start a home improvement project that will require many hours outdoors.
For the first quarter, which includes the beginning of the spring selling season — and the end of an extraordinarily cold and difficult winter — the company reported disappointing results. Sales at existing stores in the Northeast declined from the year before, and sales at existing stores in its Southern and Western divisions increased.
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