June 18 (Bloomberg) -- Builders began work on more U.S. houses in May and permits for new single-family homes rose to a five-year high as residential real estate underpins an economy that’s generating little inflation.
Housing starts climbed 6.8 percent, less than forecast, to a 914,000 annualized rate from a revised 856,000 in April, Commerce Department figures showed today in Washington. Applications for one-family home construction increased to a 622,000 pace, the fastest since May 2008. Data from the Labor Department showed May consumer prices rose less than projected.
Building permits that exceed the pace of ground-breaking signal further construction gains that will propel growth as manufacturing cools and federal budget cuts take hold. Inflation below the Federal Reserve’s 2 percent goal gives policy makers the leeway to address joblessness as they consider at their meeting today and tomorrow when to dial down record monetary stimulus.
“The housing recovery is still very much on track, and we’re going to see stronger activity in the second half of the year,” said Mark Vitner, an economist in Charlotte, North Carolina, at Wells Fargo Securities LLC, a unit of the top U.S. mortgage lender. “I think a lot of people have been looking at the stimulus by the Fed and expecting inflation to pick up. To have inflation you have to have stronger economic growth.”
Stocks advanced for a second day, pushing the Standard & Poor’s 500 Index to its highest since May 30, as investors awaited the outcome of the Fed’s policy meeting for clues to the central bank’s plan for stimulus. The S&P 500 increased 0.8 percent to 1,651.81 at the close in New York.
The Labor Department’s consumer-price index rose 0.1 percent in May, restrained by the first decrease in the cost of food in almost four years. The gain in the cost of living was the first in three months and followed a 0.4 percent decrease in April.
Consumer inflation climbed 1.4 percent in the 12 months to May, less than the Fed’s 2 percent goal, after a 1.1 percent year-over-year gain in April. One reason the Fed doesn’t want inflation below 2 percent is it raises the risk that an unexpected shock could tip the economy into deflation, or a persistent decline in prices that is hard to reverse.
A recession in Europe and slower growth in emerging markets such as China, combined with restrained wage gains in the U.S., have made it difficult for companies to raise prices.
A report today showed Europe’s car sales slumped to a 20-year low in May as record joblessness caused by a recession in the euro area reduced demand. Registrations dropped 5.9 percent to 1.08 million vehicles from 1.15 million a year earlier, the Brussels-based European Automobile Manufacturers’ Association said.
In China, property prices in major cities rose at the fastest pace in more than two years, constraining the ability of policy makers to ease credit in response to weaker economic growth.
The median estimate of 82 economists surveyed by Bloomberg called for a 950,000 rate of housing starts. Forecasts ranged from an 875,000 pace to a 1.02 million rate after an initially reported 853,000 in April.
Improving property values and cheaper borrowing costs may be encouraging some Americans to buy new homes before mortgage rates head higher. The average rate on a 30-year fixed loan jumped to a 14-month high of almost 4 percent last week from a four-month low of 3.35 percent in early May, according to Freddie Mac data.
Mortgage rates are climbing because of heightened consumer demand for loans, Neil Dutta, an economist at Renaissance Macro Research LLC in New York, said in a note to clients yesterday.
The pickup in rates has so far failed to damp homebuilder sentiment. A measure of builder confidence climbed in June to its highest level since March 2006, a National Association of Home Builders/Wells Fargo index showed yesterday. The gauge rose to 52 from 44 in May.
“A lot of us are expecting that we need 1.6 million to 1.9 million housing starts to keep up with population growth,” Brad G. O’Connor, chief accounting officer at Red Bank, New Jersey-based builder Hovnanian Enterprises Inc., said in a June 13 presentation. “Housing creation shows that we should still have a fair amount of pent-up demand and an ongoing recovery to the housing market, that we’re just in the beginning of that recovery.”
Total building permits decreased 3.1 percent to a 974,000 million annualized rate in May, reflecting a 10 percent slump in applications for multifamily dwellings, today’s Commerce Department report showed.
Construction of single-family houses rose 0.3 percent to a 599,000 rate from 597,000 the prior month. Work on multifamily projects such as apartment buildings increased 21.6 percent to an annualized rate of 315,000.
Two of four regions had an increase in starts last month, including a 17.8 percent jump in the South and a 5.7 percent gain in the West. Construction dropped 13.7 percent in the Midwest, which may have been due to wetter-than-normal weather in the region.
“The volatility is probably mostly due to weather,” Vitner said. “The spring was a little damper than usual and that has had a larger impact on starts than it has had on permits.”
Last month, precipitation across the contiguous U.S. was 0.47 inches above average, and the wettest May since 1995, according to the National Oceanic and Atmospheric Administration. Most of the northern U.S. had above-average precipitation. Iowa had its wettest May ever.
Builders such as West Lake Village, California-based Ryland Group Inc., which reported a first-quarter profit for the first time in six years, still see further strides for housing.
“There is no market that is not active today, which is another good sign,” Chief Executive Officer Larry T. Nicholson said in a June 13 presentation. “There’s a huge opportunity for demand that’s sitting on the sidelines that can’t buy a house today, because they have some ding on their credit.”
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