Residential construction plummets to year-low

by Associated Press

Published: June 16,2010

WASHINGTON — Home construction plunged last month to the lowest level since December and building permits also fell, the latest signs that the construction industry won’t fuel the economic recovery.

Builders are scaling back now that government incentives have expired.

The Commerce Department said today that construction of new homes and apartments fell 10 percent in May to a seasonally adjusted annual rate of 593,000. 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. It was the largest monthly drop in single-family construction since January 1991.

Applications for new building permits, a sign of future activity, also fell. They sank 5.9 percent to an annual rate of 574,000, the lowest level in a year.

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 pulled down by 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 and is 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.

In a typical economic recovery, the construction sector provides much of the fuel. But that hasn’t happened this time. Developers are trying to sell a glut of homes built during the boom years. And they must compete against foreclosed homes selling at deep discounts.

Homebuilders are feeling less confident in the recovery now that government incentives for buyers have expired. The National Association of Home Builders said yesterday 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.