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Craig Schaid's Blog

By Craig Schaid | Agent in Pike Road, AL

Housing starts drop underscores economic woes

New construction of homes fell more than expected in August, dragging on economic growth and keeping pressure on President Barack Obama to do more to help the sputtering economy.

Housing starts dropped 5 percent, the most since April, to a seasonally adjusted annual rate of 571,000 units, the Commerce Department said on Tuesday.

Economists polled by Reuters had forecast groundbreaking activity would fall to only a 590,000-unit rate in August. Housing starts are at less than a third of their peak during the housing boom.

"The housing market is not only bad, but still missing low expectations," said Sal Catrini, a managing director for equities at Cantor Fitzgerald & Co in New York.

An overhang of previously owned homes on the market has left builders with little appetite to break ground on new projects and is frustrating the economy's recovery from the 2007-09 recession.

The housing market "won't improve until the labor market improves substantially and that doesn't look like that would happen this year," said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.

Housing has been a persistent headwind to the U.S. recovery, although now it only accounts for about 2.4 percent of gross domestic product, down from about 6.1 percent reached during the housing boom.

U.S. stock prices rose as investors shook off the data and turned their focus to a two-day meeting the Federal Reserve that kicked off on Tuesday. The Fed is expected to end its meeting with a decision to take further steps to aid the economy. U.S. Treasury debt prices were little changed.

The ongoing weakness in housing keeps pressure on the White House to provide more support.

Obama, who is struggling with a 9.1 percent unemployment rate that imperils his re-election bid next year, has proposed a $447 billion stimulus package combining tax cuts with infrastructure spending and extended jobless benefits.

The administration is also working with the Federal Housing Finance Agency, a regulator, to try to expand a program that helps distressed borrowers with government-backed loans.

Some other government props for the sector, however, are set to fall away. At the end of this month, the size of the loans federal housing agencies can purchase will fall, and next year government-controlled mortgage companies Fannie Mae and Freddie Mac will begin to raise fees on the loans they purchase.

RECESSION WATCH

The fall in new residential construction in August may have been fueled in part by tropical storms, including Hurricane Irene, which pummeled the East Coast at the end of the month. Starts in the Northeast fell 29.1 percent.

Most of the weakness in new construction nationwide was concentrated in the multi-family housing sector, where starts dropped 13.5 percent.

Single-family home construction -- which accounts for a larger share of the market -- slipped 1.4 percent.

With overall economic growth looking less steady, the International Monetary Fund warned on Tuesday the United States could slip back into recession.

However, the consensus view among economists is that the country will dodge that bullet.

Heavy manufacturer Caterpillar Inc on Tuesday reported a slight acceleration in machinery sales to North American dealers in the three months through August, a sign demand remains steady.

In another upbeat sign, General Motors reached a tentative deal to create more than 6,000 U.S. factory jobs, union officials said.

The housing sector also saw a glimmer of hope in Tuesday's data, with permits for future construction up 3.2 percent in August. A day earlier, home-builder Lennar Corp had forecast a strong fourth quarter.

Still, the sector does not look ready to provide much support to economic growth anytime soon.

"Housing isn't going anywhere fast," said Sean Incremona, an economist at 4Cast in New York. "The permits side is a little bit more positive looking, but it doesn't look like things are really finding their way off the ground."

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