Home Construction Rises While Producer Prices Fall

Single-family home starts are up 37 percent from January, the month analysts now consider the market bottom.
Single-family home starts are up 37 percent from January, the month analysts now consider the market bottom. (By Jim R. Bounds -- Bloomberg News)
By Annys Shin
Washington Post Staff Writer
Wednesday, August 19, 2009

The housing market showed further signs of stabilization in July with builders breaking ground on more single-family homes for a fifth consecutive month, new government data showed on Tuesday. But the frail state of the broader economy was also evident as weak demand dragged down prices for both raw materials and finished goods by a record margin.

Construction of single-family homes rose 1.7 percent in July to a seasonally adjusted annual rate of 490,000 units, after jumping more than 17 percent in June, the Commerce Department reported. Overall, total housing starts were lower than expected, pushed down by a steep decline in starts for apartment buildings and other types of multifamily housing.

Meanwhile, the Labor Department said the producer price index -- which measures prices for finished goods -- was down 0.9 percent in July compared with June, led by a drop in energy prices. Prices also fell over a wide array of industries and stages of production. Since last July, producer prices are down a record 6.8 percent. The decline suggests that inflation is unlikely to be a threat anytime soon, but it also reflects consumers' ongoing skittishness.

In Tuesday's earnings news, sinking sales lowered profits at retailers Home Depot and Target during the second quarter. Both chains still managed to beat Wall Street expectations because of cost-cutting.

The earnings reports helped send U.S. stock markets higher Tuesday. The blue-chip Dow Jones industrial average closed up 82.60 points, or 0.9 percent, and the broader Standard & Poor's 500-stock index closed up 9.94 points, or 1 percent. The tech-heavy Nasdaq composite index closed up 25.08 points, or 1.3 percent. In earnings released after the closing bell, tech giant Hewlett-Packard slightly exceeded analyst forecasts for the fiscal third quarter.

In the mixed housing-starts report, traders focused on the positive. Single-family home starts are now up 37 percent compared with January, the month analysts now consider the bottom of the current cycle.

The increase in single-family home starts could be an early sign of a rebound in housing, albeit a sluggish one. Single-family housing starts are typically one of the first areas of the market to recover after a slump, along with new-home sales; existing-home prices recover later.

The Commerce Department data indicated that single-family starts are likely to keep rising. Permits for single-family homes, a gauge of future building activity, rose 5.8 percent from June to July to a seasonally adjusted annual rate of 458,000.

Analysts, meanwhile, cautioned that permits have not increased as much as starts, suggesting slow growth going forward. Potential buyers remain constrained by rising unemployment and tight credit conditions, analysts said.

"While starts have moved off of their cyclical bottom, we see limited upside potential over the months ahead," Richard Moody, chief economist for Forward Capital, an Austin-based real estate investment research firm, wrote in a note to clients. "In the single-family segment, continued weakness in the labor market and what will remain a steady stream of foreclosures will keep downward pressure on house prices and ensure that builders -- in an increasingly broad geographic range of markets -- see steady competition from low-priced foreclosures."

Condo and apartment builders also face a glut of inventory, and the credit crunch has made it harder to finance new projects. Multifamily starts, which can be volatile from month to month, were down 16.7 percent from June to July, to a seasonally adjusted annual rate of 80,000, matching the low set in April, the Commerce Department data showed. Permits for multifamily housing were down more than 26 percent compared with June, and down more than 73 percent from July 2008.

The housing construction problems hampered suppliers as well. Executives with Home Depot, the world's largest home-improvement retailer, have noticed the fall-off in residential construction, noting in a conference call with analysts on Tuesday that sales of lumber and basic building materials were down while sales of home-maintenance staples, such as lawn mowers and paint, were doing better. During the three months ended Aug. 2, Home Depot's sales fell 9 percent year over year, to $19 billion, and profit decreased 7.2 percent.

Anemic demand at stores reached up the supply chain, with prices for many crude materials, as well as intermediate and finished goods, falling in July, Labor Department data showed. The price of gasoline also fell more than 10 percent, giving cash-strapped consumers a break at the pump.

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