New Home Construction Down Sharply in May

New housing starts and applications for permits both fell sharply in May as the government’s tax credits for homebuyers expired. The news overshadows positive news on manufacturing and wholesale inflation fronts. A lull in new home construction generally translates to a spike in joblessness, as construction fuels growth in a variety of industries. From manufacturers of appliances to lumber yards to the makers of paint and stucco, the effects of a slowdown in construction are felt across the economy. The irony is that while slow construction cuts jobs, many are citing the unemployment rate as a chief reason for not buying a new home.

New home and apartment construction dropped ten percent in May, down to a seasonally adjusted rate of 592,000. April’s figures were revised downward to 660,000. Applications for new building permits, a barometer of future construction activity, fell nearly 6 percent to a 575,000 annual rate. This is the lowest the number has been in a year. Builders are scaling down now that the federal tax credits for homebuyers have expired. Key proof of this is the number of new single-family homes, which fell by 18 percent, the largest monthly drop since January 1991.

Some builders are seeing opportunity in the struggling market, buying up discounted land with the intent of developing it when a recovery is well underway. The bleak housing news was mixed with positive news from other sectors of the economy. Industrial production climbed for the third consecutive month, and wholesale inflation remains relatively small. US factories, mines, and utility companies all reported growth.

Wholesale prices dipped for a second month in a row, fueled by a 7 percent drop in gas prices and home heating oil prices. Core inflation, which does not count energy or food prices, rose slightly as well.

Inflation is expected to be held in check into June, as well, due mostly to falling energy costs, especially gasoline. Food costs in May saw the biggest decline since last July, led by an 18 percent drop in the cost of fresh vegetables, which had been driven upward by freezes in Florida at the beginning of the year.

The fact that inflation remains relatively in check translates to the Federal Reserve being able to keep interest rates down, which will aid in the recovery of the economy. Wall Street was relatively unaffected by the bad news from the housing sector as the Dow Jones climbed nearly 20 points in afternoon trading after the figures were released. The pace of new home construction, while up 40 percent from April 2009, when it reached bottom, is still down 70 percent from the peak of the housing boom in January 2006.

Typically, after a recession, construction fuels the recovery of the overall economy. This time around, however, that will not be the case. Developers are still saddled with a huge inventory of homes built during the boom, and competition is stiff with all the foreclosed and otherwise distressed properties on the market. Consequently, new home sales, which made up about 15 percent of the market in the years before the recession, now account for only about 7 percent.