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Rise in permits could herald building ramp-up

Workers go about their jobs at a new housing development in Carlsbad, Calif. Construction of new homes dipped unexpectedly last month as bad weather hit much of the country. Applications for future projects rose, however.Lenny Ignelzi / AP
/ Source: staff and news service reports

Applications for future construction projects unexpectedly climbed last month, foreshadowing what could be a better spring for home building after a rough winter, government data showed on Wednesday.

The Commerce Department said applications for new building permits, a gauge of future activity, rose 11 percent to an annual rate of 653,000, a far stronger showing than economists had predicted and the highest level of activity since October 2008.

The data also showed that the housing market remains a significant risk to the economy, as bad weather across much of the country hit the construction industry.

Construction of new homes and apartments fell 4 percent in December to a seasonally adjusted annual rate of 557,000 from an upwardly revised 580,000 in November.

The results for new home construction were lower than the 580,000 forecast by economists surveyed by Thomson Reuters and were led by declines of 19 percent in the Northeast and Midwest. Construction fell 1 percent in the West, but rose more than 3 percent in the South.

"Builders continue to be nervous about the employment situation and the number of foreclosures out there competing with them," said David Crowe, chief economist at the National Association of Home Builders. Another problem, Crowe noted, is that builders have seen their financing for new projects dry up steadily over the past 18 months.

Patrick Newport, an economist with IHS Global Insight, noted that home permits have increased strongly for two straight months, which should lead to more hiring in the construction industry.

"The economy has performed much better than we had anticipated that it would perform six months ago," Newport said.

Hurdles remain, though.

Sal Guatieri, an economist at BMO Capital Markets, said the slowdown in construction in the last three months of the year could be a drag on economic output.

While home construction usually snaps back at the start of an economic recovery, Guatieri expects the housing and financial crises to "leave an enduring footprint on this recovery."

The building industry has dramatically scaled back construction amid the worst housing bust in decades. Thousands of foreclosed homes have been dumped on the market at bargain prices that make it difficult for the builders to compete.

Another source of worry is that lending standards are also tightening too. The Federal Housing Administration, a primary source of funding for first-time homebuyers, said Wednesday it would raise fees and tighten lending standards to shore up its strapped finances.

Meanwhile, inflation pressures at the wholesale level eased in December as a drop in energy prices offset a big jump in food costs.

The Labor Department said Wednesday that wholesale prices edged up 0.2 percent last month, much slower than the 1.8 percent surge in November. Energy prices, which had been up for two months, fell in December.

The price performance at the wholesale level combined with last week's benign reading on consumer prices supported the view that inflation is not a problem.