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Housing Starts Soar To 4-Year High, But Is Upside Limited?

Housing construction soared to a four-year high last month as builders rushed to meet apartment demand, a report showed Wednesday, but weak job and income growth could limit further upside.

Overall housing starts reached an annualized rate of 872,000, up 15% from August, the Commerce Department said. Single-family starts rose 11% to 603,000, while housing with five units or more leapt 25% to 260,000.

Apartments look to continue leading construction, with permits up 22.8% from August and 93.4% from a year ago. That's the biggest yearly gain since late 1993. Single-family permits rose 6.7% on a monthly basis.

U.S. stock indexes closed slightly higher, despite disappointing earnings from IBM (IBM) and others late Tuesday and Wednesday. But homebuilders like Lennar (LEN), KB Home (KBH), D.R. Horton (DHI) and PulteGroup (PHM) rallied.

While the latest construction data reinforce views that housing is gaining momentum, the recovery's boost to the overall economy may be dampened by the high demand for apartments, which produce fewer jobs and require less spending.

Weak employment and income gains may also prevent the housing market from improving faster. Payrolls expanded by just 114,000 last month, and higher prices are eroding stagnant wages.

"Until the economy sees more robust hiring and income growth, it is hard to see why households will be willing to allocate more of their scarce resources to housing," said Yelena Shulyatyeva, a U.S. economist at BNP Paribas, in a research note.

Appreciation in home prices should be slower in the second half of the year vs. the first half, she predicted.

A report from Bankrate's Interest.com found that a median-income household can afford a median-priced home in only 14 of the top 25 metropolitan areas.

With unemployment still at an elevated rate of 7.8% and banks keeping credit tight, the housing rebound doesn't look like it can go much further, wrote Steve Blitz, chief economist at ITG Investment Research.

"The notion that housing will now lead rather than reflect the overall economy is a bit too optimistic," he said.

But jobs and incomes are still trending higher, noted Jordan Levine, director of economic research at Beacon Economics.

As job growth accelerates next year, income gains will pick up too and sustain the housing recovery, Levine says.

"It's not going to be spectacular," he said. "But you can expect moderate improvement."