U.S. Economy: Building Permits Slump to 14-Year Low (Update5)

By Bob Willis


Nov. 20 (Bloomberg) -- Homebuilding permits in the U.S. slumped in October to their lowest level since 1993 and construction of single-family homes tumbled, indicating the industry has yet to reach bottom.

Housing starts unexpectedly rose due to a jump in work on condominium projects. Economists view permits as a better gauge of the outlook for the housing market, which may hobble the economy as companies from Target Corp. to Starbucks Corp. cut their forecasts for fourth-quarter growth.

``All of us are ratcheting down our expectations for the bottom of the housing sector and I don't think we're there yet,'' said David Resler, chief economist at Nomura Securities International Inc. in New York.

Construction permits fell 6.6 percent to a 1.178 million pace, the fifth straight decline, the Commerce Department said in Washington. Builders broke ground on 1.229 million homes, up 3 percent from September, led by a 44 percent surge in multifamily work.

Federal Reserve policy makers lowered their growth forecasts in October and worried about credit-market losses, according to the minutes of their Oct. 31 meeting issued today. Central bankers described the quarter percentage-point reduction in the benchmark interest rate target as a ``close call.''

Fed Forecasts

The records of the gathering were accompanied by estimates and language that highlighted risks to growth. Traders anticipate the central bank will be forced to trim borrowing costs again next month.

Ten-year Treasury notes fell, with yields rising to 4.10 percent at 4:41 p.m. in New York from 4.07 percent yesterday, while the dollar remained near a record low against the euro. The Standard & Poor's builder composite index lost 4 percent to close at 282.02.

Freddie Mac, the second-biggest buyer of U.S. mortgages, today posted a record loss and warned it may need additional capital and may cut its dividend. A slump in the value of mortgages reduced core capital, prompting a possible need for more money.

Construction of single-family homes fell 7.3 percent to the lowest since October 1991.

Sales of single-family homes are dropping as potential buyers wait for prices to fall even more and some banks make it more difficult to get mortgages. Demand is declining as fast as construction, preventing builders from trimming inventories and suggesting the real-estate recession will linger into 2008.

`Too Much Inventory'

``Builders still have too much inventory given the current traffic, and are likely to cut back construction further,'' said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina, who forecast a gain in starts. ``We'll probably see starts bottom out in the spring or shortly before the summer.''

Residential investment subtracted about 1 percentage point from economic growth in the third quarter and may do so again this period, analysts said.

Minneapolis-based Target, the second-largest U.S. discount chain, posted an unexpected decline in quarterly profit today. J.C. Penney Co., Kohl's Corp. and other retailers have lowered their profit predictions for the holidays as customers cut back on spending.

Building permits were forecast to drop to a 1.2 million pace, according to the median forecast of 75 economists polled by Bloomberg News, with projections ranging from 1.1 million to 1.324 million. Housing starts were projected to fall to a 1.17 million unit pace, from an originally reported 1.191 million in September. Estimates ranged from 1.05 million to 1.25 million.

Single-Family

Construction of single-family homes dropped to an 884,000 pace, while work on multifamily homes rose to a 345,000 annual rate.

The increase in starts was led by a 21 percent jump in the Midwest. Construction rose 8.5 percent in the Northeast and 5.8 percent in the West. Starts fell 4.6 percent in the South.

``This report was generally on the weak side and arguably weaker than expected,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``The housing doldrums continue.''

A report yesterday added to evidence that housing was far from recovery. The National Association of Home Builders/Wells Fargo confidence index held at a record low of 19 in November.

Toll Brothers Inc., the largest U.S. luxury homebuilder, said Nov. 8 that fourth-quarter revenue fell 36 percent and the cancellation rate rose to the highest ever.

Foreclosures Jump

Foreclosures doubled in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, RealtyTrac Inc. said Oct. 11.

Rising foreclosures and falling sales are adding to inventories and pushing down prices. The Case-Shiller index of home prices in 20 major cities declined 4.4 percent in the 12 months though August, the most since records began in 2001.

Declining home equity also deprives some owners of the cash used to buy other goods and services or fund home-improvement projects.

Lowe's Cos., the second-largest home-improvement retailer, yesterday said third-quarter profit declined 10 percent and reduced its annual profit forecast for the second time in two months because of the housing slump.

Consumer spending, which accounts for about 70 percent of the economy, will grow at a 2 percent annual rate in the fourth quarter, down from 3 percent in the prior three months, according to the median forecast of economists surveyed by Bloomberg earlier this month. The economy will grow at a 1.5 percent rate, less than half the reported 3.9 percent third- quarter pace, the survey shows.