U.S. housing data signals economic strength; manufacturing weak

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. housing starts in November rebounded from a seven-month low and permits surged to a five-month high, signs of strength in the economy as the Federal Reserve starts raising interest rates after years of easy monetary policy.

The U.S. central bank on Wednesday raised its benchmark overnight interest rate by 25 basis points to between 0.25 percent and 0.50 percent, the first rate increase in 9-1/2 years, in a vote of confidence in the economy.

"The rate hike has a strong signalling effect that the U.S. economy is on solid ground ... and will not stonewall economic expansion," said Perc Pineda, chief economist of Credit Union National Association in Madison, Wisconsin.

Groundbreaking jumped 10.5 percent to a seasonally adjusted annual pace of 1.17 million units last month, the Commerce Department said. Building permits vaulted 11 percent to a 1.29 million-unit rate, the highest since June.

With permits running ahead of starts, home building is likely to remain supported in the months ahead.

The Fed noted that "the housing sector has improved further." The increase in borrowing costs is unlikely to stifle the housing recovery as the Fed made it clear that the tightening cycle will be "gradual," which would keep rates low by historic standards.

While housing is thriving, the industrial sector continues to be buffeted by the headwinds of a strong dollar and cutbacks in inventory investment as well as spending cuts by energy firms in response to persistently low oil prices (CLc1) (LCOc1).

In a separate report, the Fed said industrial production fell 0.6 percent in November as unusually warm weather caused a sharp drop in demand for utilities.

The third straight monthly decline in industrial output also reflected another sharp fall in mining production, driven by a plunge in oil and gas drilling. Manufacturing output was unchanged. However, motor vehicle production fell for the first time since August, a worrying signal for manufacturing.

"We expect the auto sector to remain a drag on total production in coming months. On balance, manufacturing activity is likely to remain weak as the U.S. economy is still adjusting to the shocks of lower energy prices and weaker foreign demand," said Laura Rosner, an economist at BNP Paribas in New York. U.S. stocks ended higher, with the S&P homebuilding index (.SPLRCHOME) gaining 2.8 percent. D.R. Horton Inc (DHI.N), the largest U.S. homebuilder, rose 2.54 percent. Lennar Corp (LEN.N), the nation's second-largest homebuilder, advanced 2.58 percent. The dollar was firmed against a basket of currencies (.DXY), while prices for U.S. Treasury debt fell.

STRONG HOUSING FUNDAMENTALS

November marked the eighth straight month that housing starts remained above a 1-million unit annual pace, the longest stretch since 2007. Economists expect starts to average around 1.1 million units for 2015, which would be the highest since 2007 and up from 1.0 million in 2014.

Robust household formation as labour market strength encourages young adults to leave their childhood homes is underpinning the housing market recovery.

But the sector remains constrained by a persistent shortage of houses for sale. This has resulted in home prices rising faster than salaries, pushing more people towards renting.

"Tight inventories and high prices will provide the incentives for builders to continue ramping up activity," said Greg Daco, head of U.S. macroeconomics at Oxford Economics in New York.

Single-family housing starts, the largest segment of the market, increased 7.6 percent to a 768,000-unit pace. That was the highest reading since January 2008. Activity was probably also boosted by mild weather. Groundbreaking on single-family projects rose in the South, Northeast and West, but fell in the Midwest.

Starts for the volatile multi-family segment surged 16.4 percent to a 405,000-unit pace. That segment has been the driver of residential construction but a shift towards single-family homes is expected in 2016.

"Homebuilders are making progress addressing the shortage of newer-vintage single-family homes we see in many markets, especially affordable housing products with a price of under $200,000," said Tian Liu, chief economist at Genworth Mortgage Insurance in Raleigh, North Carolina.

Permits to build single-family homes increased 1.1 percent last month to the highest since December 2007. Multi-family building permits soared 26.9 percent.

(Reporting by Lucia Mutikani Additional reporting by Megan Cassella; Editing by Paul Simao and James Dalgleish)