Builders sit out recovery

WASHINGTON — Home builders are sending a message: They won't be able to contribute much to the economic recovery now that government home-buying incentives are vanishing.

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 houses. 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.

Applications for new building permits — a sign of future activity — sank 5.9 percent to an annual rate of 574,000, the lowest level in a year.

Builders are scaling back now that federal tax credits are on their way out. The evidence: The number of new single-family homes tumbled 17 percent, the largest monthly drop since January 1991.

The Senate on Wednesday approved a plan to give homebuyers an extra three months to finish qualifying for the incentives. The move by Senate Majority Leader Harry Reid, D-Nev., would give buyers until Sept. 30 to complete their purchases and qualify for tax credits of up to $8,000. Under the current terms, buyers had until April 30 to get a signed sales contract and until June 30 to complete the sale.

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 was $2.70, down from $2.87 a month ago, according to AAA's Daily Fuel Gauge Report.

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.

The rate of home building is still up about 41 percent from the bottom in April 2009. But it's down 70 percent from the decade's peak in January 2006.

In a typical economic recovery, the construction sector provides much of the fuel. But that hasn't happened this time. Developers are trying to sell a glut of homes built during the boom years. And they must compete against foreclosed homes selling at deep discounts. As a result, new home sales made up about 7 percent of the housing market last year, down from about 15 percent before the bust.

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. The impact is felt across multiple industries, from makers of faucets and dishwashers to lumber yards, but it has weakened in recent years.

Spending on residential construction and remodeling made up only about 2.4 percent of the nation's economic activity in the first quarter of the year. That's down from a peak of more than 6 percent during the housing market's boom years.

This story was originally published June 16, 2010 at 9:45 PM with the headline "Builders sit out recovery."