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Home construction up, building permits fall

Construction of new homes rose more than expected in April, but new building permits fell sharply, signaling that the building industry's rebound could be short-lived.
/ Source: The Associated Press

Construction of homes surged in April to the highest level in 18 months, fueled by buyers capitalizing on an expiring tax credit. Permits for new construction sank, signaling the rebound could fade.

Low mortgage rates and two tax credits — up to $8,000 for new buyers and $6,500 for current owners who buy and move into another home — have boosted home sales this year. To receive a tax credit, borrowers had to have a signed offer by April 30 and must close the deal by the end of June.

The rate of home building has now risen more than 40 percent from the bottom in April 2009, though it's still down 70 percent from the decade's peak in January 2006.

Without the tax credit, analysts say home sales will slow in the second half of this year. High unemployment and tight lending standards will likely help keep many buyers away.

The report Tuesday from the Commerce Department said the rate of construction of single-family homes and apartment buildings rose 5.8 percent last month to a seasonally adjusted annual rate of 672,000. That was up from an upwardly revised March level of 635,000. The rate, the highest since October 2008, was driven by a 10 percent increase in single-family home building.

A separate report Tuesday showed wholesale inflation remains tame. Prices fell 0.1 percent in April, the second drop in three months. Core inflation, which excludes volatile energy and food prices, rose 0.2 percent, the Labor Department said. But over the past year, core prices are up just 1 percent.

The absence of inflation pressures means the Federal Reserve can keep interest rates at record lows to bolster the economic recovery.

In the Commerce report, the government said building permits, a gauge of future activity, sank 11.5 percent to an annual rate of 606,000. That's the lowest point since October 2009.

Still, a survey Monday showed homebuilders are feeling more optimistic. The National Association of Home Builders said its housing market index, which tracks industry confidence, rose three points this month to 22, the highest reading since August 2007. Readings below 50 indicate negative sentiment.

In March, sales of new homes rose 27 percent in March. That was the biggest monthly increase in 47 years.

A four-decade low stockpile of new single-family homes, combined with low interest rates and prices, has made home buying affordable, said Sal Guatieri, an economist with BMO Capital Markets. That means that even without the tax credits, housing starts should rise modestly.

"Until the foreclosure wave ebbs and the overhang of unsold existing homes abates, the recovery in homebuilding will be subdued, Guatieri said.

For April, food costs dipped by 0.2 percent. It was the first decline in nine months. And it came after a 2.4 percent surge during the previous month — the largest gain in 26 years. The March increase reflected the impact of a winter freeze in Florida that damaged citrus and vegetable crops.

Energy prices fell 0.8 percent in April with gasoline prices down 2.7 percent.

The rise in core inflation followed two straight months of 0.1 percent gains. Household appliances posted a 1.9 percent jump, the largest since October 1974. Passenger car prices rose 0.6 percent. It was the biggest such increase since June.

Economists predict a report on consumer prices on Wednesday will also show slight price pressures. They are predicting overall prices and core inflation will both post 0.1 percent gains.

The recession has banished inflation for now. The more than 8 million jobs lost over the past two years has left workers without the bargaining power to boost wages.

In addition, companies, facing slack demand and idle plant capacity, have lacked the ability to raise prices.

The absence of inflation has allowed the Fed to keep its benchmark federal funds rate at a record low of zero to 0.25 percent since December 2008. The Fed has sought to invigorate economic growth.

Some Fed officials have argued that the greater threat now is the risk of deflation, or a debilitating drop in prices. That is something the United States has not suffered since the Great Depression.