US housing slump may help avoid recession

Home building posted a small gain in April, but permits for future construction plunged by the largest amount in 17 years, a sign the nation's housing industry is still in a deep slump.

Construction of new homes and apartments rose to a seasonally adjusted annual rate of 1.528 million units in April, an increase of 2.5 percent from the March level.

Even with the improvement, housing construction is 16.1 percent lower than a year ago, reflecting the amount of the slide since a five-year boom in housing ended last year.

In a troubling sign for the future, builders cut their requests for new construction permits by 8.9 percent in April. That was the sharpest drop since a 24-percent fall in February 1990, another period when housing was going through a significant downturn. The slide pushed the annual rate for permits down to 1.429 million units, the lowest level in nearly 10 years.

While the April increase in actual construction was the third consecutive advance, analysts said the far more telling figure was the steep slide in permits, given that they are viewed as a far better indicator of where housing is headed.

"The drop in permits is one of the biggest on record. It suggests the contraction is housing is not over and has some months to play out," said Bill Hampel, chief economist for the Credit Union National Association.

On Wall Street, the Dow Jones industrial average shrugged off the worrisome news on housing to surge higher, climbing by 103.69 points to close at 13,487.53, the 23rd record close of the year.

Housing, which had enjoyed record sales in both new and existing homes for five straight years, saw the boom end dramatically in 2006 with many formerly red-hot sales areas suffering big declines in sales and prices.

The slump in housing has been a drag on the overall economy, pushing business growth down to a lackluster 1.3 percent in the first three months of this year, the weakest performance in four years, the AP reports.

Some buyers are delaying purchases in anticipation of a drop in home prices as stricter lending guidelines and subprime mortgage defaults add to the glut of unsold properties, economists said. The housing recession remains the biggest threat to the Fed's forecast of “moderate” economic growth.

“The drag from housing is going to continue for a while,” said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “The decline in permits suggests starts will weaken further.”

Construction of single-family homes rose 1.6 percent last month to a 1.225 million rate, the most this year, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, increased 6.3 percent to an annual rate of 303,000.

The increase in housing starts was led by a 31 percent jump in the Northeast and a 7.8 percent gain in the West. Starts fell 14 percent in the Midwest and were down 0.1 percent in the South.

Factory output, which accounts for about four-fifths of industrial production, rose 0.5 percent led by gains in motor vehicles, computer and electronics gear. The coldest April in a decade also increased home-heating demand, boosting overall production.

“The manufacturing part of the economy is going back on stream,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina.

A report yesterday showed builders became more pessimistic this month. The National Association of Home Builders/Wells Fargo sentiment index fell to 30 from 33 in April. The reading matched September's figure as the lowest since 1991. Readings below 50 mean most respondents view conditions as poor.

The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, has raised concern more homes will be thrown back on the market as foreclosures rise, Bloomberg reports.

A separate report on Wednesday showed U.S. mortgage applications fell last week for the first time in four weeks, weighed down by sagging demand for home purchase loans.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and purchasing loans, for the week ended May 11 dipped 0.8 percent.

These latest reports lent credence to the pessimistic outlook on Tuesday by the National Association of Home Builders, which reported that home builder sentiment sank in May as lenders made it more difficult for borrowers to qualify for mortgages and order cancellations mounted, Reuters reports.

Source: agencies

Prepared by Alexander Timoshik

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Author`s name Alex Naumov