Housing Construction Declines as Federal Incentives Expire

Wednesday, June 16, 2010

Home construction plunged last month to the lowest level since December as builders scaled back without a federal tax credit to lure buyers.

The U.S. Commerce Department says construction of new homes and apartments fell 10 percent from a month earlier to a seasonally adjusted annual rate of 593,000, the Associated Press reports. April's figure was revised downward to 659,000.

The results were driven by a 17 percent decline in the single-family market, which had benefited earlier in the year from federal tax credits of up to $8,000.

Applications for new building permits, a sign the construction industry won't fuel the economic recovery, also fell. They sank 5.9 percent to an annual rate of 574,000, the lowest level in a year.

Typically the construction sector provides much of the fuel for economic recovery. However in this case, developers are trying to sell a glut of homes built during the housing boom. They are also competing against an overflow of foreclosed homes selling at low prices.

In a separate report, the Labor Department said wholesale prices fell for a second straight month in May, reflecting big declines in energy costs. The 0.3 percent drop in May was due to a 7 percent drop in gasoline prices and a 7.4 percent decline in home heating oil prices. Core inflation, which excludes energy and food, rose 0.2 percent in May, up just 1.3 percent over the past 12 months.

The continued absence of inflationary pressures means that the Federal Reserve, which meets next week, can keep interest rates low to provide support for the economic recovery.

The housing report missed Wall Street expectations by a wide margin. Economists surveyed by Thomson Reuters had predicted that housing construction would only fall to seasonally adjusted annual rate of 650,000 and had forecast that building permit applications would increase to an annual rate of 630,000.

The National Association of Home Builders said Tuesday its housing market index fell in June after two straight months of increases. Builders had been more optimistic earlier in the year when buyers could take advantage of tax credits of up to $8,000. Those incentives expired on April 30, although buyers with signed contracts have until June 30 to complete their purchases.

Experts anticipate home sales will slow in the second half of this year. In addition, high unemployment and tight mortgage lending standards have kept buyers away.

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