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U.S. Economy: Housing Starts Jump, Inflation Eases (Update2)
By Bob Willis and Joe Richter
Oct. 18 (Bloomberg) -- Housing construction in the U.S. rebounded in September from a three-year low and falling energy prices led inflation to slow, suggesting growth may pick up while letting the Federal Reserve keep interest rates steady.
Housing starts increased 5.9 percent to an annual rate of 1.772 million from a 1.674 million pace in August, the Commerce Department said today in Washington. In a separate report, the Labor Department said the consumer price index dropped 0.5 percent from August, the biggest decline since November.
The figures, along with the most recent reports on retail sales and the labor market, diminish concerns that falling house prices will cause the economy to stagnate. At the same time, the slide in gasoline prices may also signal the worst of the inflation threat is behind Fed policy makers after 17 consecutive rate increases.
``The real economy is going along pretty much as the Fed wanted to see it,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, referring to inflation. ``Indicators continue to point to moderating housing activity, just not a melting down or collapsing.''
Stocks advanced and bonds fell in the minutes after the reports were published, before erasing their decline and trading little changed at 12:12 p.m. in New York. A Standard & Poor's index of 16 homebuilder stocks, including D.R. Horton Inc. and Centex Corp., rose 1 percent today and is up about 19 percent from a two-year low in July.
Incentives
Builders broke ground on more homes last month after cutting prices and offering incentives to clear out inventories of unsold homes. An index of homebuilder confidence increased this month for the first time in a year, led by rising sales expectations for the next six months.
Stepped-up construction in the Midwest and South made up for declines in the Northeast and the West. Building permits dropped for an eighth straight month, to the lowest level in almost five years.
``We're nearing the end of the slowdown, but we're not quite there yet,'' said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York.
Countering the tame overall reading on inflation, so-called core prices that exclude food and energy rose 0.2 percent for a third month. The report also showed the biggest year-over-year increase in core prices in a decade, suggesting the slowdown in inflation will be gradual.
Core Prices
Core prices rose 2.9 percent from a year ago, the biggest 12-month jump since February 1996, after a 2.8 percent gain.
The 12-month increase is ``OK for a time as long as policy makers are confident that growth will moderate enough to allow core inflation to come off soon,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. ``However, if growth reaccelerates in the fourth quarter, as we expect on the back of lower gasoline prices, then the Fed's patience will be tested.''
The economy grew at an annual rate of 2.5 percent last quarter and will maintain that pace in the final three months of the year, according to the median forecast of 82 economists surveyed by Bloomberg News from Oct. 2 through Oct. 10.
The worst housing-industry downturn in more than a decade has reduced economic growth this year. Economists polled by Bloomberg News forecast housing starts to fall to a 1.64 million unit pace from an originally reported 1.665 million rate in August, according to the median of 61 projections, which ranged from 1.58 million to 1.74 million.
Permits
Starts, which increased for the first time since May, are down almost 18 percent from a year earlier. Building permits fell 6.3 percent to an annual rate of 1.619 million from 1.727 million the prior month. Not since April to November 1974 have permits declined eight straight months.
Sales of new homes unexpectedly rose in August, after the prior three months' figures were revised down, and inventories of unsold new homes edged down from a four-decade high, the Commerce Department said on Sept. 27.
The National Association of Home Builders/Wells Fargo index of builder confidence rose to 31 this month from 30 in September, when it reached its lowest level in 15 years, the group reported yesterday in Washington.
Single-Family Homes
New construction of single-family homes increased 4.3 percent in September to a 1.426 million rate, the Commerce Department said in its report today. Starts of multifamily homes, such as townhouses and apartment buildings, rose 12.7 percent to an annual rate of 346,000.
Starts increased 14 percent in the South and 3.4 percent in the Midwest. They fell 14 percent in the Northeast and 2.2 percent in the West.
The number of homes under construction fell 1.2 percent in September to a 1.328 million pace. Housing completions rose 11 percent to an annual rate of 2.084 million. The number of housing units authorized, but not yet started, decreased 11 percent to 202,600.
More than half of U.S. homebuilders, 55 percent, are offering extras such as fireplaces, hardwood floors or garages to entice buyers, up from 37 percent a year earlier, said Gopal Ahluwalia, director of research at the National Association of Home Builders in Washington. Four percent are giving away cars, he said.
The housing slump and mortgage rates that have risen from four-decade lows in 2003 are making it more difficult for Americans to borrow against their home equity, a source of funding in the recent expansion, economists say. Growth may slow to an average 2.5 percent pace in the second half from a 4.1 percent average rate in the first half, according to a Bloomberg survey of economists.
Mortgage Rates
Still, recent declines in mortgage rates, as well as steady income gains and rising consumer confidence, may help revive sales, economists say. The average rate on a 30-year mortgage fell to 6.37 percent last week from 6.8 percent in late July, according to Freddie Mac, the nation's second-largest buyer of mortgages.
The Fed will hold its key rate unchanged next week at 5.25 percent, and keep it there until the second quarter of 2007, when it may cut it to 5 percent, according to the median estimate in a Bloomberg survey of 80 economists. The Fed in June ended a two-year string of 17 consecutive rate increases that brought the overnight rate up from a four-decade low of 1 percent and slowly pushed up mortgage costs.
Toll Brothers Inc., the largest luxury builder, reported a 19 percent drop in fiscal third-quarter profit, its first decline in four years.
``There's no doubt that real estate is down but certain markets are doing well,'' Chief Executive Officer Robert Toll said on Oct. 12, as he opened sales at the company's first condominium project in Manhattan. ``I can't say that the worst is behind us and I can't say that it's not.''
