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Home building gain likely to fade with tax credit

WASHINGTON (AP) — 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 homebuyers 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 Tuesday.

That's the highest level since October 2008. It was driven by a 10 percent increase in single-family home building. 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 Tuesday 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.

To receive either tax credit, borrowers had to have a signed offer by April 30 and must close the deal by the end of June.

About 2.2 million households have used those credits at a cost of $16 billion through late March, according to the Internal Revenue Service. There's been no push in Congress to extend them.

Still, builders are feeling hopeful. The nationwide supply of unsold new homes has declined and now stands at the lowest level in 40 years. And many builders are buying up failed projects or undeveloped lots that fell into foreclosure and are restarting development projects, said Brad Hunter, chief economist with Metrostudy, a real estate consulting firm.

"Those builders that are still alive are actually finding themselves with projects that are in demand and in good locations," he said.

The National Association of Home Builders' housing market index, which tracks industry confidence, rose three points this month to the highest reading since August 2007.

Nevertheless, Hunter predicts it won't be until 2012 before home construction returns to healthy levels.

In the meantime, the still-sluggish pace of the economic recovery is holding back price increases.

For April, wholesale food costs dipped 0.2 percent. It was the first decline in nine months. And it came after a 2.4 percent surge during the previous month — the largest gain in 26 years. The March increase reflected the impact of a winter freeze in Florida that damaged citrus and vegetable crops.

Energy prices fell in April with gasoline down 2.7 percent.

The rise in core inflation followed two straight months of 0.1 percent gains. Household appliances posted a 1.9 percent jump, the largest since October 1974. Passenger car prices rose 0.6 percent. It was the biggest such increase since June.

Economists predict that a report on consumer prices Wednesday will also show slight price pressures. They predicting overall inflation and core inflation will both post 0.1 percent gains.

The recession has banished inflation for now. In part, that's because the loss of more than 8 million jobs over the past two years has left workers without the bargaining power to boost wages.
   
Copyright 2010 The Associated Press.

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