October 19, 2010 / 12:33 PM / 9 years ago

Housing starts at 5-month high, still depressed

WASHINGTON (Reuters) - Groundbreaking for new homes scaled a five-month high in September, another sign the housing market is bottoming, though permits for future building fell.

A construction worker works on a new home in North Carolina, April 15, 2010. REUTERS/Chris Keane

While Tuesday’s data was encouraging, housing starts remained at depressed levels and added to the case for more monetary stimulus to shore up the sluggish economic recovery.

The Federal Reserve appears almost certain to signal it will pump more money into the economy at its November 2-3 policy meeting through fresh purchases of government securities, but it is unclear how large the program will be.

“The weakness on the housing front and the potential for a further drag from housing will support greater quantitative easing,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch in New York, referring to the Fed’s actions to keep rates low by making money cheaper.

“The likely scenario is that the Fed announces a program where they buy up five hundred billion (dollars) over a six-month period.”

Housing starts advanced for a third straight month, gaining 0.3 percent to a seasonally adjusted annual rate of 610,000 units in September, the Commerce Department said. August starts were revised up to a 608,000-unit pace from 598,000 units.

Economists had expected groundbreaking activity to slip to a 580,000-unit rate last month. Compared to September last year, housing starts were up 4.1 percent.

The data had little impact on U.S. financial markets as investors were digesting China’s first interest rate increase in three years and expressions by several Fed officials on the need for more monetary policy easing.

U.S. stocks posted their biggest loss in two months, also hurt by earnings from technology giants Apple and IBM, which disappointed investors. For Wall St stocks report see. Investors also worried an investigation into improper processing of home foreclosures could result in at least one bank being forced to buy back mortgage bonds.

Prices for U.S. government debt rose, while the dollar saw its biggest gain versus a basket of currencies since August.

NO CONSENSUS ON POLICY EASING

Three officials at the Fed — the U.S. central bank — made the case for further easing on Tuesday, with Atlanta Fed President Dennis Lockhart saying purchases of $100 billion a month could help to achieve the desired effect of stimulating the economy.

But there is no unanimity on the need for more monetary stimulus. One Fed official said the argument had not been made conclusively, while another voiced skepticism over the effectiveness of a second round of asset purchases.

The economy’s recovery from the worst recession since the Great Depression has slowed and the Fed worries that sluggish demand given a 9.6 percent unemployment rate could end up in a crippling downward spiral in prices.

The Fed has already taken benchmark interest rates effectively to zero and bought some $1.7 trillion in Treasury and mortgage-related debt.

The housing market is starting to settle down after hefty declines following the expiration of a government tax credit for home buyers. A survey on Monday showed sentiment among home builders edged up this month.

However, recovery will likely be feeble amid an overhang of unsold homes and stubbornly high unemployment, even though mortgage rates are near record lows.

New building permits dropped 5.6 percent to a 539,000-unit pace last month after a 2.1 percent increase in August. Permits were dragged down by a 20.2 percent tumble in multifamily units. Permits for single-family homes rose 0.5 percent.

Economists had expected overall building permits to rise to a 580,000-unit pace in September.

“Mounting shadow inventories, near record-low home sales and a lack of jobs mean any pick-up will be painful and will take time to develop,” said Yelena Shulyatyeva, an economist at BNP Paribas in New York.

Groundbreaking last month was lifted by a 4.4 percent increase in single-family home construction. Starts for the volatile multifamily segment fell 9.7 percent.

Analysts are keeping a wary eye on the foreclosures investigation, which they fear may stall the housing market’s recovery as banks hold back on planned foreclosures. The White House warned banks on Tuesday it would pursue them for any mortgage practices that violated the law.

“As we see it, if the costs and risks of lending have risen, even as a result of recognizing past mistakes, lenders may back away from their incipient recovery in lending appetite,” said Steven Wieting, an economist at Citigroup in New York.

“Sales disruptions would tend to be more concentrated in distressed home resale markets than new home sales and construction.”

Editing by James Dalgleish

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