Home construction falls; wholesale prices edge up

WASHINGTON -- The housing market remains a significant risk to the economy, data Wednesday showed, as bad weather across much of the country hammered the construction industry.

Along with icy storms, the real estate recovery is facing man-made headwinds. On Wednesday, the government said buyers will face higher fees and tougher standards for home loans backed by the Federal Housing Administration, a popular source of loans for first-time buyers.

Unemployment is expected to remain high throughout the year, which will drive the foreclosure rate to new records.

"If we don't get some jobs, it's not going to make a difference," said Rick Jenkins, owner of R.J. Builders in Terre Haute Ind.

Construction of new homes and apartments fell 4 percent in December to a seasonally adjusted annual rate of 557,000 from an upwardly revised 580,000 in November, the Commerce Department said. Applications for future projects, however, increased strongly as the industry ramps up for the spring selling season.

The results for new home construction were lower than the 580,000 forecast by economists surveyed by Thomson Reuters and were led by declines of 19 percent in the Northeast and Midwest. Construction fell 1 percent in the West, but rose more than 3 percent in the South.

Like homeowners, builders are also having trouble getting loans. David Crowe, chief economist at the National Association of Home Builders, said the industry has seen financing for new projects dry up steadily over the past 18 months.

Applications for new building permits, a gauge of future activity, rose 11 percent to an annual rate of 653,000, a far stronger showing than economists had predicted and the highest level of activity since October 2008.

Analysts were divided about the report's significance. Patrick Newport, an economist with IHS Global Insight, noted that home permits have increased strongly for two straight months, which should lead to more hiring in the construction industry.

"The economy has performed much better than we had anticipated that it would perform six months ago," Newport said.

However, Sal Guatieri, an economist at BMO Capital Markets, said the slowdown in construction in the last three months of the year will be a drag on economic output.

While home construction usually snaps back at the start of an economic recovery, Guatieri expects the housing and financial crises to "leave an enduring footprint on this recovery."

The building industry has dramatically scaled back construction after the worst housing bust in decades. Thousands of foreclosed homes have been dumped on the market at bargain prices that make it difficult for the builders to compete.

Another source of worry is that lending standards are also tightening too. The Federal Housing Administration, the dominant source of funding for first-time homebuyers, said Wednesday it would raise fees and standards for borrowers to qualify. The agency needs to shore up its precarious finances amid fears that it will need a taxpayer bailout.

"The changes are a necessary adjustment but it does not mean that it won't hurt a little," said Chris Brown, a loan officer with Trinity Mortgage Co. in Orlando, Fla.

The FHA does not make loans, but rather offers insurance against default. Borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price -- a minimum level that will remain the same under the new rules.

Meanwhile, inflation pressures at the wholesale level eased in December as a drop in energy prices offset a big jump in food costs.

The Labor Department said Wednesday that wholesale prices edged up 0.2 percent last month, much slower than the 1.8 percent surge in November. Energy prices, which had been up for two months, fell in December.

The price performance at the wholesale level combined with last week's benign reading on consumer prices supported the view that inflation is not a problem.

But on Wall Street, investors instead focused on tighter lending rules in China. If the country's huge economy slows, it could hurt demand for U.S. exports. In late afternoon trading, the Dow Jones industrial average was down 160 points from a 15-month high, its biggest drop since Oct. 30.