Home-building rises, but worries persist

By Renae Merle
Washington Post Staff Writer
Wednesday, October 21, 2009

New-home construction rose modestly last month, according to government data released Tuesday. But the uptick was less than expected as economists continued to worry that the expiration of a tax credit for first-time home buyers could sap recent growth in the housing market.

Housing starts grew 0.5 percent in September compared with August, to a seasonally adjusted 590,000 annual rate, according to the Commerce Department. That was less than the annual rate of 615,000 analysts had forecast and down 28 percent from the same period last year.

The data reflect the uneven beginning of a long housing recovery, analysts said. "The recovery will be far from vigorous. Rather, it will be a gentle, halting, drawn-out affair," said Mike Larson, a real estate analyst at Weiss Research. "Think three steps forward, two steps back here."

The weaker-than-expected housing numbers overshadowed strong earnings reports from several companies and sent stocks down Tuesday. The Dow Jones industrial average fell 0.5 percent, to 10,041.48, while the broader Standard & Poor's 500-stock index dropped 0.6 percent, to 1091.06.

The rise in housing starts was largely driven by a 3.9 percent increase in construction of single-family homes, which offset a decline in the multifamily market, which includes apartment buildings. Construction starts in that market, which are often volatile, fell 15.2 percent last month. A 7.1 percent increase in housing starts in the South, which includes the Washington region, made up for declines in the rest of the country.

But many analysts were focused on a decline in applications for building permits, considered a sign of future activity. Applications fell 1.2 percent in September.

That could indicate that the recent increase in home sales spurred by the first-time-home-buyer tax credit has already begun to wane, analysts said. The $8,000 tax credit expires at the end of next month, and housing industry economists and lobbyists are pushing for its extension and expansion.

"We're concerned about that," said Robert Denk, assistant vice president for forecasting and analysis at the National Association of Home Builders. "The expiration of the tax credit has the potential to prolong the pain" in the housing market.

Pressure to extend the credit has been building on Capitol Hill, but Shaun Donovan, secretary of the Department of Housing and Urban Development, told a Senate committee Tuesday that the administration has not decided whether to support it. "In general, the tax credit has been a positive force in the market," he said. But given the other actions the administration is taking to boost the housing market, including keeping interest rates low, the expiration of the credit would not be "catastrophic," he said.

Continued softness in new-home construction does not spell doom for the entire housing market, said Craig Thomas, a senior economist for PNC Financial Services Group. There has already been stabilization of home prices in some parts of the country and there are still too many existing homes on the market, he said.

"We don't need any new houses. A muted pace of housing starts, that is just fine with me," Thomas said. "There are so many other good indicators of a broadly stabilizing, improving economy out there, we don't need this one indicator to establish that higher confidence."

Meanwhile, wholesale prices declined more than expected last month because of a decline in energy prices. The producer price index fell 0.6 percent on a seasonally adjusted basis, according to the Labor Department. Analysts had expected a 0.3 percent decline.

The data included a 2.4 percent drop in energy prices, led by falling gasoline prices. Excluding food and energy, which can be volatile, prices fell 0.1 percent. Analysts had expected them to rise 0.1 percent.

The decline in core prices was a pleasant surprise and means that with inflation under control the Federal Reserve will not face pressure soon to raise interest rates, said Brian Bethune, financial economist for IHS Global Insight. Most of the decline was related to dropping prices of technology products, he said. "It gives companies an opportunity to upgrade their infrastructure. . . . It increases the purchasing power," he said.

Staff writer Dina ElBoghdady contributed to this report.

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