May 19, 2:51 PM EDT

Surge in home construction is lifting hopes for US economy


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WASHINGTON (AP) -- The U.S. housing market has given a sudden jolt to what appeared to be a slumping economy.

Builders broke ground on homes last month at the fastest pace in more than seven years. The stepped-up construction is helping boost sales at stores like Home Depot and Lowe's and improving the likelihood that the U.S. economy will accelerate after likely shrinking early this year.

In part, the surge in housing starts in April reflected a rebound from a dismal winter that shut down construction sites and hampered growth across the economy. Builders may struggle to maintain their robust April pace. But there is reason for optimism.

For one thing, construction of single-family houses rose in regions of the country where winter weather had had little impact. For another, the rate of approved building permits - a harbinger of future construction - rose a solid 10 percent from March to April. That reflects buyer demand.

"If you're willing to buy a house, that speaks volumes about your confidence, job prospects and economic fortunes going forward," said Michael Dolega, a senior economist at TD Bank.

The hints of a healthier economy follow a bleak first quarter. Growth is thought to have gone in reverse from January through March, a result of a harsh winter, a stronger dollar squeezing U.S. exports and lower oil prices cutting into factory orders.

On Tuesday, the government reported a surprising 20.2 percent jump in residential construction to a seasonally adjusted annual pace of 1.14 million. As a result, analysts at Barclays slightly raised their forecast for economic growth in the April-June quarter to 2.7 percent from 2.6 percent, and Macroeconomic Advisers boosted its estimate to 2 percent from 1.9 percent.

By region, house and apartment building starts surged last month in the Northeast, Midwest and West, while slipping slightly in the South. All four regions enjoyed increased construction of single-family houses.

The sharpest gain by far was in the Northeast, where the pace of construction soared nearly 86 percent. That suggested that freezing temperatures and snowstorms held back builders early in the year and that last quarter's jump pointed to strong pent-up demand.

In part, the increased home building reflects a dual nature of the U.S. economy: Hiring has been solid even while overall economic growth has remained feeble.

Employers added a healthy 223,000 jobs in April, causing the unemployment rate to slip to 5.4 percent from 5.5 percent. The economy has gained about 3.1 million jobs - and paychecks - over the past 12 months.

The economic growth that those paychecks should fuel has so far proved elusive. Even so, demand for housing has picked up. Sales of existing homes jumped 6 percent in March, the National Association of Realtors said last month.

But a tight supply has been keeping a lid on sales: The market has just 4.6 months' worth of available homes, compared with six months in what economists would consider a healthy market. Further strong construction could ease those worries about supply.

The Realtors reported that more sales contracts were signed in March, raising the likelihood that the trade group will report an increase in April purchases on Thursday.

The rebound in housing has bolstered building supply stores. Households with homes worth over $200,000 have seen their property values rise, emboldening them to buy more big-ticket items, Carol Tome, Home Depot's chief financial officer, said in a conference call with analysts Tuesday.

Such demand drove up both sales and profits for the chain with more than 2,200 stores in North America, with more shoppers buying water heaters, riding mowers and grills.

Home Depot earned $1.58 billion, or $1.21 per share, for the three months that ended May 3. That compared with $1.38 billion, or $1 per share, a year earlier. The company expects sales to improve as 1 million households should be formed this year, Tome said.

Additional strong construction would help accelerate economic growth. Historically low 30-year fixed mortgage rates below 4 percent have improved affordability. Still, because it takes at least 12 months to prepare land for construction, the process can take time to ramp up, said Todd Mansfield, CEO of the developer and real estate investment firm Crescent Communities.

Mansfield is waiting to see whether home buying remains strong in May and June.

"We've had some false optimism in prior years," he said. "It's great news, but it needs to be repeated for a few months."

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AP Business Writers Michelle Chapman and Joseph Pisani contributed to this report.

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