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U.S. Economy: Housing Fell as End of Credit Loomed (Update1) Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Shobhana Chandra and Courtney Schlisserman

Nov. 18 (Bloomberg) -- Residential construction in the U.S. unexpectedly dropped in October amid concern a homebuyer tax credit would expire, illustrating the market’s dependence on government help to sustain a recovery as job losses mount.

Builders broke ground on 529,000 houses at an annual pace, down 11 percent from the prior month and the fewest since April’s record low, Commerce Department figures showed today in Washington. Data from the Labor Department signaled inflation will be of little concern for the Federal Reserve.

Homebuilding seized up as builders waited for President Barack Obama to extend a first-time buyer incentive, which has since been passed and expanded. The highest unemployment rate in 26 years and consumer prices that remain below Fed long-term goals indicate policy makers will need to nurture the economy by keeping interest rates near zero.

“The recovery isn’t well established enough yet to take away that support,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who previously worked at the Fed. “An early withdrawal of fiscal and monetary stimulus would probably be quite disruptive.”

Stocks dropped following the reports, pulled down by declining technology shares as profit forecasts trailed some analyst estimates. The Standard & Poor’s 500 Index fell 0.4 percent to 1,106.08 at 2:48 p.m. in New York. The S&P Homebuilder Supercomposite Index climbed on expectations that interest rates will remain low.

Unexpected Drop

Housing starts were projected to rise to a 600,000 annual pace, according to the median forecast of 77 economists surveyed by Bloomberg News. Estimates ranged from 570,000 to 630,000. The government revised September’s reading to a 592,000 pace from a previously reported 590,000.

Building permits, a sign of future construction, dropped to a 552,000 annual pace last month from 575,000. They were forecast to climb to a 580,000 annual rate, according to the survey median.

The Labor Department today reported consumer prices rose 0.3 percent in October from the prior month and were down 0.2 percent from the same time last year. Excluding food and energy costs, the so-called core index rose 0.2 percent for a second month, exceeding the median estimate of economists surveyed.

Higher prices for new and used cars and increases in airline fares pushed the core gauge up, the report showed.

Fed on ‘Hold’

“I don’t see anything in the report that suggests there’s any real inflation flare-up,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “The Fed is comfortably on hold.”

The Fed earlier this month repeated that it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.

“Inflation seems likely to remain subdued for some time,” Fed Chairman Ben S. Bernanke said in a Nov. 16 speech to the Economic Club of New York.

Fed policy makers’ long-term forecast for their preferred measure of inflation, the Commerce Department index tied to consumer spending and excluding food and fuel, calls for gains in a range of 1.7 percent to 2 percent. It was up 1.3 percent in the 12 months to September.

Mortgage Applications

Another report today showed mortgage applications to purchase houses fell last week to the lowest level since November 1997. The Mortgage Bankers Association’s index of applications dropped 4.7 percent in the week ended Nov. 13.

Obama and Congress this month extended a tax credit of as much as $8,000 for first-time homebuyers until April 30, from Nov. 30. They also expanded it to include some current owners.

Construction of single-family houses, which last month accounted for 90 percent of the market, decreased 6.8 percent to a 476,000 rate, today’s report showed. Work on multifamily homes, such as townhouses and apartment buildings, plunged 35 percent to an annual rate of 53,000 that was the lowest since records began in 1959.

“The prospects for this segment of the housing market are grim,” David Resler, chief economist at Nomura Securities International Inc. in New York, said in a note to clients referring to the slump in multifamily construction. Resler said record rental vacancy rates and a lack of credit for commercial projects will continue to hurt this area.

Wet October

The weather may have also played a part in depressing construction activity, economists said. Last month was the wettest October in more than a century of record keeping, according to the National Oceanic and Atmospheric Administration.

While all four regions of the U.S. showed declines, the decrease in starts was led by a 19 percent slump in the Northeast.

Toll Brothers Inc., the largest U.S. luxury homebuilder, is among companies seeing improvement. The Horsham, Pennsylvania-based company last week said orders surged 42 percent in the quarter ended Oct. 31, while cancellations slowed and revenue beat analysts’ estimates.

Gains in consumer confidence, more stable home prices and fewer unsold houses “suggest that the new home market should be improving,” Chief Executive Officer Robert Toll said in a statement. “We sense that it is, though slowly and through choppy waters.”

To contact the reporters on this story: Shobhana Chandra in Washington schandra1@bloomberg.net; Courtney Schlisserman in Washington cshlisserma@bloomberg.net

Last Updated: November 18, 2009 14:49 EST

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