New Home Starts Drop Sharply

By:: Kirk Haverkamp | November 18, 2009

New housing starts and residential building permits fell unexpectedly in October, dealing a blow to hopes that an improving housing market would help lead the economy out of recession.

Construction starts on privately owned residences fell 10.6 percent in October, to an annual rate of 526,000 units, according to figures released today by the Commerce Department. It’s the lowest rate of private new housing starts since April and well below the 590,000 level that had held relatively steady over the past four months.

The news came as a shock to industry observers, who had predicted a slight increase. New construction starts on multiunit residences were down by one-third, while construction starts on single family residences were down a more modest 6.8 percent to 476,000 units.

Residential building permits also declined, though not as sharply. Authorizations for privately-owned housing units were at a 552,000 annual rate in October, down 4 percent from the month before. Authorizations for single-family units were essentially unchanged at 451,000.

It’s believed the decline was due in part to uncertainty over the extension of the first-time homebuyer tax credit, which was due to expire Nov. 30. However, Congress earlier this month extended the $8,000 credit through April 30 and expanded it to include a $6,500 credit for repeat homebuyers as well.

The relatively steady level of construction permits issued suggests construction starts may pick up again in the wake of the extension of the tax break, though October’s decline raises questions about the direction the housing market will take once the credits expire for good at the end of April.

Meanwhile, the Federal Reserve may not start raising interest rates for another two and a half years in order to maintain support for the economy, provided that inflation remains under control, according to remarks by a Fed official. James Bullard, president of the Federal Reserve Bank of St. Louis, said today that the experience of previous recessions suggests Fed will not begin raising interest rates again until early 2012, although it may begin to tighten credit sooner if inflation begins to kick in and unemployment declines.

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