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Daily Global Commentary

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Turnaround in Construction of New Single−Family Homes Not In 2008

Tue, Aug 19 2008, 20:16 GMT
by Asha Bangalore

Northern Trust

Turnaround in Construction of New Single-Family Homes Not In 2008

Construction of new homes fell 11.0% in July to an annual rate of 965,000 after a 10.4% increase in June. These large swings in housing starts during June and July reflect the impact of a building code change for multi-family units in New York. The count of single-family starts is not distorted by the change in code and should be used to assess the status of new home construction. Starts of single-family units declined 2.9% in July to an annual rate of 641,000 following a 3.2% drop in the prior month. Starts of single family homes are down 64.3% from the peak in January 2006.

On a regional basis, starts of new single-family homes fell in the Midwest (-6.1%) and the South (-7.8%) but rose in the Northeast (+11.3%) and West (+5.9%) in July. The sharp decline in starts of single-family homes should not be surprising given the large inventory of unsold new single-family homes.

The number of permits issued for building new homes fell 17.7% in July vs. a 16.4% jump in June. Again, this large decline in July is due to the hefty increase in extensions of permits during June brought about by a change of building codes in New York. Permits for new single-family units fell 5.2%, a more muted drop compared with total permits. Permits for new single-family homes have declined 67.5% from the peak in September 2006. The magnitude of declines in housing starts and permits of single-family homes in the current cycle is the largest peak-to-trough drop since record keeping for housing starts and permits began in 1960.

Producer Price Index: Sharp Gain of Core PPI Is Troublesome

The Producer Price Index (PPI) of Finished Goods moved up 1.2% in July after gains of 1.4% and 1.8% in May and June, respectively. Prices of both food and energy have moved up sharply during the last three months, but the 0.7% jump during July of the core PPI of finished goods, which excludes food and energy, was the surprise in the July wholesale price report. The recent drop in energy prices and other commodities should translate into a moderation of wholesale food and energy prices in August.

The 3.1% increase in the energy price index reflects higher prices for home heating oil (+3.7%), diesel, electricity, natural gas, liquefied petroleum gas, and lubricating oils, while the price of gasoline fell 0.2%. The 0.3% gain in food prices was due to widespread increases in food prices.

The core PPI of finished goods, which excludes food and energy, was up 0.7% in July compared with gains of 0.2% in each of the prior two months. In July, higher prices for new cars (+1.4%), light trucks (+0.8%), and a 0.8% jump in the capital equipment price index were some of the major gains among widespread increases.

As long as firms can pass on higher wholesale prices of inputs to consumers, margins of firms will be unaffected. However, businesses have not been able to pass on higher inputs costs as seen in Chart 6.

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Published on  Tue, Aug 19 2008, 20:20 GMT