June 17, 2010 in City

Homes won’t build recovery

With incentives gone, construction declines
Alan Zibel Associated Press
 

WASHINGTON – Homebuilders are sending a message: They won’t be able to contribute much to the economic recovery now that government home-buying incentives have vanished.

Home construction and applications for building permits sank in May, overshadowing favorable reports on manufacturing and wholesale inflation.

Fewer homes mean fewer jobs. Construction fuels a broad swath of industries across the economy. Yet double-digit unemployment is among the main reasons people have passed on buying new homes. Even with near-record-low mortgage rates, the industry is struggling.

“The economy is growing and the housing market is still in recession,” said Eugenio Aleman, senior economist with Wells Fargo Securities. “It’s not going to contribute to growth, but it is not going to pull the economy back down.”

Overall, new home and apartment construction fell 10 percent in May to a seasonally adjusted annual rate of 593,000, the Commerce Department said Wednesday. April’s figure was revised downward to 659,000.

Builders are scaling back now that tax credits of up to $8,000 have expired. The biggest evidence of that trend: the number of new single-family homes tumbled 17 percent, the largest monthly drop since January 1991.

But some builders see opportunity in the down market. Andrew Zuckerman, CEO of Zuckerman Homes in Coconut Creek, Fla., said his company is purchasing land and plans to develop it as early as winter.

“We think now is a good time to buy,” Zuckerman said. “We think the market is slowly stabilizing.”

The poor report on housing came despite more promising reports on the economy. Inflation at the wholesale level remains tame and industrial production rose for the third straight month.

Output at the nation’s factories, mines and utilities climbed 1.2 percent in May, the Federal Reserve said Wednesday. Factory production rose 0.9 percent. Utility production jumped 4.8 percent, thanks to warm weather that prompted people to crank up their air conditioners. Mining was the only component that lagged.

Wholesale prices actually fell for a second straight month in May. But the 0.3 percent dip was pulled down by a 7 percent drop in gasoline prices and a 7.4 percent fall in home heating oil prices. Core inflation, which excludes energy and food, rose 0.2 percent in May. It is up just 1.3 percent over the past 12 months.

Falling energy costs are expected to keep inflation low in June. Gasoline costs are down significantly from a month ago. The nationwide average for regular gasoline is $2.70 currently, down from $2.87 a month ago, according to AAA’s Daily Fuel Gauge Report.

Food costs dropped 0.6 percent, the biggest decline since July. The decreases were led by an 18 percent drop in the cost of fresh vegetables. But vegetable prices had been driven higher because of freezes earlier in the year in Florida.

The continued absence of inflationary pressures means that the Federal Reserve, which meets next week, can keep interest rates low to provide support for the economic recovery.

Wall Street appeared to show little concern with the housing figures. The Dow Jones industrial average edged up nearly 19 points in afternoon trading.

In a typical economic recovery, the construction sector provides much of the fuel. But that hasn’t happened this time.

Each new home built creates the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the National Association of Home Builders.

© Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Thoughts and opinions on this story? Click here to comment >>

Get stories like this in a free daily email