Economy Ready to Rebound With Worst of U.S. Housing Slump Over

By Matthew Benjamin and Rich Miller

Jan. 8 (Bloomberg) -- The homebuilding industry is about to stop hurting the U.S. economy and later this year may start to help it.

The housing demand that is beginning to stir may be unleashing faster growth. While housing won't add much to the expansion before the end of 2007, it's becoming less of an impediment as price cuts, incentives and lower mortgage rates bring more buyers into the market.

"The worst of the drag on the economy from construction is behind us,'' says Chris Varvares, president of St. Louis-based Macroeconomic Advisers Llc. As a result, he says, growth should pick up to an annual rate of more than 3 percent in the second quarter, from 2-1/4 percent in the current quarter.

That would lessen pressure on the Federal Reserve to reduce interest rates, disappointing bond investors who are anticipating that Fed Chairman Ben S. Bernanke and his colleagues will cut them as soon as May.

The yield on the 10-year Treasury note rose to 4.65 percent on Jan. 5 from 4.42 percent on Dec. 4 as strong job growth and rising incomes prompted bond investors to scale back their bets on Fed rate cuts. Meanwhile, shareholders of homebuilding companies are already taking heart: An index of housing shares soared 11 percent in the final two months of 2006, outstripping the 2.9 percent advance in the Standard & Poor's 500.

"Investors are very forward-looking, and there's a sense among them that a change in momentum in the housing market is approaching,'' says Robert Curran, managing director at credit rating company Fitch Inc. in New York.

Sales of existing homes rose in October and November, the first back-to-back monthly gain since late 2005. New-home sales are up too, helping pare the number of unsold properties to 545,000 from a record 573,000 in July.

Builders still view current conditions as poor, according to a December survey by the National Association of Home Builders/Wells Fargo. For the third month in a row, though, the survey showed an increase in the number of builders forecasting higher sales in six months' time.

"There are early indications of better times ahead,'' Ara Hovnanian, chief executive officer of Red Bank, New Jersey-based Hovnanian Enterprises, the state's largest homebuilder, said on Dec. 19.

Dancing on the Bottom

Toll Brothers Inc., the nation's largest luxury home builder, "may be seeing a floor in some markets,'' says Robert Toll, chief executive officer of the Horsham, Pennsylvania-based company. Buyer "deposits and traffic, although erratic from week to week, seem to be dancing on the bottom or slightly above.''