Friday, May 21, 2010

TAX CREDIT: Home construction gain likely to fade with tax credit

Despite record-low rates, sales could drop this summer

WASHINGTON — Home construction rebounded last month to the highest level in 18 months as buyers capitalized on tax incentives. But now that those tax credits have expired, builders are scaling back.

That means the homebuilding industry isn’t likely to contribute as much to the economic recovery. Analysts expect sales to fall this summer as the effect of the tax credits fades.

Mortgage rates have remained near record-low levels. But high unemployment and tight lending standards, combined with the end of the tax credits, will keep a lid on home construction, analysts say.

“Potential home buyers are a little rattled by the state of the economy and what has happened in housing over the past two to three years,’’ said Wells Fargo economist Tim Quinlan.

The rate of construction of single-family homes and apartment buildings rose 5.8 percent last month to a seasonally adjusted annual rate of 672,000, the Commerce Department said yesterday.

That’s the highest level since October 2008. It was driven by a 10 percent increase in single-family homes. The rate of homebuilding remains 70 percent below the decade’s peak in January 2006. Still, it’s climbed more than 40 percent above the April 2009 bottom.

Adding to evidence that the pace of construction will slow was the latest reading on applications for new building permits, a gauge of future activity: Applications sank 11.5 percent in April to an annual rate of 606,000. That’s the lowest point since October 2009.

A separate report yesterday showed wholesale inflation remains tame. Prices fell 0.1 percent in April. Core inflation, which excludes volatile energy and food prices, rose 0.2 percent, the Labor Department said. But over the past year, core prices have risen just 1 percent.

The absence of inflation pressures means the Federal Reserve can keep interest rates at record lows to bolster the economic recovery. Some Fed officials think the bigger risk now is deflation — a destabilizing period of falling prices and wages. The United States hasn’t suffered from deflation since the Great Depression. Still, most economists think the risk of deflation remains remote.

The results of the Commerce report show that builders ramped up to meet demand from buyers seeking to take advantage of the two tax credits: One was up to $8,000 for new buyers. The other was $6,500 for current owners who buy and move into another home.

By Alan Zibel and Martin Crutsinger Associated Press May 19, 2010

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