Strong apartment demand led a broad advance in new-home construction last month and looks to remain the housing recovery's main engine.
Total housing starts rose 12% vs. November to an annualized 954,000, the Commerce Department reported Thursday. That's the most in 4-1/2 years and far above the 887,000 expected. Construction on housing with five or more units shot up 23%. Single-family starts were up 8%.
The strong construction figures and a five-year low in jobless claims helped push the S&P 500 to a fresh five-year high. That's despite a weak report on mid-Atlantic manufacturing.
While multifamily starts data can be volatile, December apartment construction is more than double what it was a year earlier and accounted for 35% of all starts vs. 22% in December 2011.
With credit standards still tight and Americans hesitant to pile on new debt, apartment demand should continue to outstrip the desire to own a single-family home.
"It's going to be the driving force this year," predicted Yelena Shulyatyeva, a U.S. economist at BNP Paribas.
An unseasonably warm December and post-Superstorm Sandy rebuilding likely inflated housing starts a bit, she noted. But improvements were geographically widespread and in line with other reports. The Federal Reserve's Beige Book found housing helped lead moderate economic expansion last month.
There appears to be a long-term shift in attitudes toward renting, Shulyatyeva said. "People are still afraid to own.
A heavier tilt toward apartment construction also means the housing recovery's economic benefits will be weaker. Multifamily units tend to produce fewer jobs and induce less spending vs. single-family homes.
The apartment vacancy rate hit an 11-year-low 4.5% in Q4, according to research firm Reis (REIS). That helped quicken growth in apartment rents to 3.8% in 2012 from 2.4% in 2011 and 2.3% in 2010.
There are signs the rental market is becoming saturated, with rent growth slowing in recent months, said Celia Chen, a senior director at Moody's Analytics.
But the pace of multifamily starts isn't excessive and certain trends should support continued expansion, she added. Young people are starting to form more households again, and a growing preference for urban living favors apartments.
Building permits, a gauge of future activity, edged up to their best level since July 2008. Multifamily applications dipped but remain near recent highs.
Mortgage rules from the Consumer Financial Protection Bureau could ease lending somewhat and nudge the single-family market further. But banks will still be cautious compared to the housing boom, Chen said. "They can't go back and lend the same way as before."