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Housing construction plunged in January

Construction of new homes and apartments plunged by 14.3 percent in January, the Commerce Department reported Friday.
/ Source: The Associated Press

Housing construction plunged to the lowest level in nearly a decade last month as the housing industry continued to struggle with a severe slowdown.

Meanwhile, wholesale prices dropped by 0.6 percent in January, the biggest amount in three months, providing fresh evidence that inflation pressures are easing.

Construction of new homes and apartments plunged by 14.3 percent in January, pushing total activity down to a seasonally adjusted annual rate of 1.408 million units, the Commerce Department reported Friday.

The decline pushed activity to the slowest pace since August 1997 with construction in January 37.8 percent below the pace of a year ago. The steep decline last month followed two months of construction increases which had raised hopes that perhaps the worst of the housing slump was over.

The weather was blamed for part of the setback. November and December had been unusually mild while more normal winter weather returned to much of the country in January, depressing building activity.

However, economists said the depth of the decline showed that housing was still facing major problems after a five-year boom which ended last year with falling construction and declining sales of both new and existing homes.

David Seiders, chief economist of the National Association of Home Builders, said that builders were slashing sales prices and offering other incentives such as upgraded kitchens and free decks to move homes.

“The use of incentives has not abated,” he said. “The percentage of builders trimming prices has been increasing and the use of non-price incentives is expanding as well,” he said.

On Wall Street, the Dow Jones industrial average edged up 2.56 points to 12,767.57, the Dow’s 30th record close since October.

The housing report showed that applications for new building permits, considered a good barometer of future activity, fell in January for the 11th month out of the past 12, dropping by 2.8 percent to an annual rate of 1.568 million units.

By region of the country, housing construction was down 28.5 percent in the West, 15.2 percent in the Midwest and 11.8 percent in the South. Construction starts were up only in the Northeast, a gain of 8.9 percent.

Analysts said the weakness in January construction meant that housing, which shaved more than a percentage point off economic growth in the last half of 2006, will continue to be a drag going into the new year.

On Thursday, the National Association of Realtors said that sales of existing homes fell in 40 states in the fourth quarter of 2006 and home prices dropped in 49 percent of the metropolitan areas surveyed, the widest price decline in the history of the Realtors’ survey.

Mark Zandi, chief economist at Moody’s, said he looked for prices to continue falling.

“This market will not find a bottom until this inventory is worked off and the only way for that to occur is through further price declines,” he said.

In the inflation report, the Labor Department said that the 0.6 percent drop in its Producer Price Index was the biggest one-month decline since a 1.8 percent fall in October.

The decline last month occurred because of a 4.6 percent plunge in energy costs, reflecting lower prices for gasoline, natural gas and home heating oil.

But even outside of the volatile energy and food categories, inflation pressures were well contained, rising by a modest 0.2 percent as the price of new cars and trucks fell as automakers struggle with huge inventories of unsold cars.

Federal Reserve Chairman Ben Bernanke told Congress this week that the central bank believed inflation pressures would gradually recede over the coming two years as the economy expands at a moderate pace.

Many private economists believe the central bank is close to achieving its hoped-for soft landing in which growth slows enough to keep inflation contained without pushing the country into a recession.