Weak home building a drag on economic recovery

In this Oct. 21, 2009 photo, a new home under construction in Tallahassee, Fla., is shown. Construction of new homes unexpectedly plunged last month, as builders waited to see whether lawmakers would extend a tax credit for homebuyers. (AP Photo/Phil Coale)

WASHINGTON — WASHINGTON — The budding economic recovery isn't getting much help from the home-building industry, which normally creates jobs and drives growth when a recession ends.

Uncertainty over whether a homebuyer tax credit would be extended weighed down construction last month — a sign of how much the fledgling recovery depends on government support.

Home building unexpectedly plunged to its lowest point since April, the Commerce Department said Wednesday. The figures show that builders fear there aren't enough buyers to soak up the glut of unsold homes already on the market — a supply magnified by record-high foreclosures.

Congress renewed the homebuyer tax credit earlier this month and broadened its reach. But even with government aid, the weakness of the housing sector is dragging on the economy.

"It will take a while before residential construction begins to contribute meaningfully to growth," Jennifer Lee, an economist at BMO Capital Markets, wrote in a research note.

The tepid recovery is also holding down inflation. While consumer prices edged up faster than expected in October, they remain lower than they were a year ago. And inflation is expected to stay subdued.

The Labor Department said consumer prices rose 0.3 percent in October, a bit more than the 0.2 percent economists had expected. Core inflation, which excludes energy and food, rose 0.2 percent, compared with expectations for a 0.1 percent rise.

The higher figure was driven by another increase in energy prices and the biggest jump in new-car prices in 28 years. The prices of used cars and trucks also rose by the most since September 1980. Together, new- and used-car prices accounted for 90 percent of the increase in core inflation last month, government analysts said.

Analysts said the jump in used-car prices was due partly to the government's Cash for Clunkers rebate program. The program reduced the stockpile of used vehicles. This happened because cars that qualified for the clunkers program were junked and so weren't available for resale.

The clunkers program also drove up new-car prices, analysts said. It helped reduce the supply of new cars just as the latest model-year vehicles, which typically carry a premium, were arriving in showrooms.

"The Cash for Clunkers program may have wiped out the '09 models that have been sitting there, but the brand-new 2010 models come, and they can command a higher price for those," said James Brock, an economist at Miami University in Oxford, Ohio, who studies the auto industry.

On Wall Street, stocks edged down after the unexpected drop in home construction and disappointing forecasts from technology companies. The modest drop came a day after major stock indicators closed at 13-month highs, including the Dow Jones industrial average, which has risen nine of the past 10 days. The Dow lost more than 32 points in afternoon trading Wednesday, and broader indexes also dipped.

The report on home construction said building of homes and apartments fell 10.6 percent in October to a seasonally adjusted annual rate of 529,000, from an upwardly revised 592,000 in September. Economists polled by Thomson Reuters had expected a pace of 600,000.

"There has not has not been much improvement in the underlying demand for new and existing homes," said Mark Vitner, senior economist with Wells Fargo Securities. "That's a warning for 2010."

So is a decline in applications for building permits — a gauge of future activity. Applications fell 4 percent to an annual rate of 552,000 units. That was the lowest since May and missed analysts' expectations of 580,000. Still, applications for single-family homes fell only 0.2 percent.

The National Association of Home Builders said this week that its housing market index remained unchanged in November, reflecting a cautious outlook from home builders. The trade association said its index stood at 17 for the second straight month; readings below 50 indicate negative sentiment.

Developers, facing weak demand and competition from low-priced foreclosures, have scaled back sharply. The number of homes under construction last month fell 3.4 percent to 560,000, the lowest on records dating to 1970.

With construction levels low, however, the inventory of unsold homes has been dropping. At September's sales pace, it would take about 7.5 months to sell off all the new homes on the market. That's down from a peak of 11 months last fall. But it's still short of a healthy level of around a six-month supply.

"It's still not a great market," said Brad Hunter, chief economist with Metrostudy, a real estate research firm. "But it's not as bad as it was six months ago."

People who have owned their current homes for at least five years can now claim a tax credit of up to $6,500 for a home purchase. First-time homebuyers qualify for up to $8,000. To qualify, buyers must sign a purchase agreement by April 30.

Since the tax credit was extended earlier this month, Beazer Homes USA Inc. and other builders have said they're gearing up to buy land in some markets, citing expectations that sales will improve next year.

Foreclosures, though, remain sky-high. And many experts predict a new wave starting next spring. More than 332,000 households, or one in every 385 U.S. homes, received a foreclosure-related notice in October, according to RealtyTrac Inc.

Those trends are weighing on the economic rebound.

In an interview with Fox News on Wednesday, President Barack Obama said he's worried that spending too much government money to help revive the economy could undermine a fragile U.S. recovery and cause a double-dip recession. That occurs when the economy begins to recover briefly from a recession only to be dragged back under.

Obama said his administration is considering tax breaks that could encourage businesses to begin hiring again. But he added that if the nation keeps adding to deficit spending through tax cuts or more stimulus spending, people could lose confidence in the U.S. economy, and that could "lead to a double-dip recession."

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Associated Press Writer Ken Thomas contributed to this report.