Upticks in Home Starts, Inflation Are Seen as an Aberration

By Mark Whitehouse
From

Consumer prices resurged a bit and builders broke ground on more new homes in December, but the activity did little to change economists' view that inflation is cooling and that the housing slump has yet to hit bottom.

A bump up in energy prices caused consumer prices to rise 0.5% in December from a month earlier after remaining flat or falling in the three previous months, the Labor Department reported yesterday. Excluding food and energy, so-called core prices -- a measure officials at the Federal Reserve watch closely -- rose 0.2%, in line with economists' expectations, as apparel retailers ratcheted back holiday discounts. Compared with a year earlier, overall prices rose 2.5% and core prices were up 2.6%.

Meanwhile, unusually warm weather prompted new-home construction to rise for the second consecutive month, the Commerce Department reported. At a seasonally adjusted annual rate of 1.64 million in December, housing starts were up 4.5% from November, but still down 18% for the year. All of the gain came in multi-unit structures such as apartment buildings. Construction of new single-family homes, which account for about three-fourths of total activity, fell 4.1% in December from the previous month despite the warm weather. Single-family housing starts were down 25% from a year earlier.

Economists saw the reports as well within the game plan of Fed policy makers, who expect persistent weakness in housing to help cool the economy, gradually bringing core inflation back down to a more acceptable annual level of 1% to 2%. In the fourth quarter, core prices rose at an annualized rate of 1.4%.

"Things are playing out pretty much along the lines the Fed expected," said Joshua Shapiro, chief U.S. economist at consultancy MFR, Inc. "Inflation pressures are gradually easing and housing is still weak."

While many economists believe the worst of the housing slump has passed, declines in home construction could still have a way to go. Major housing slumps over the past several decades have seen home construction drop by an average of about 60% over at least two years. As of December, total new-home construction was down 28% from its most recent peak, which came in January 2006.

Builders face a large backlog of unsold homes, suggesting they will likely have to pull back further to get supply in line with demand. Earlier this week, home buildersLennar Corp. andCentex Corp. offered downbeat outlooks, with the latter saying it was facing the toughest market in 25 years. The National Association of Home Builders index of sentiment has shown some improvement in recent months, though it remains well below 50, meaning negative responses outweigh positive.

On the inflation front, concerns remain. For one, workers' wages have started rising after a long period of relative dormancy: As of December, the average hourly production wage stood at $17.04, up 4.2% from a year earlier. When people make more money, they tend to push prices of goods and services up, though so far that hasn't been evident in the consumer-price data, said Andrew Tilton, U.S. economist at Goldman Sachs in New York.

"The dog that hasn't barked is really wage inflation," he said. "That's the biggest risk over the next six months or so."

Another concern is that the recent string of subdued inflation numbers could be the temporary result of unusually heavy holiday discounting. In recent months, big retailers such asWal-Mart Stores Inc. andBest Buy Co. have slashed prices of electronics items such as flat-panel televisions in an effort to spur sales. That trend appeared to continue in December, as audio and video prices fell 0.7% from a month earlier.

In apparel, though, retailers appeared to be regaining the power to raise prices. Apparel prices rose 0.3% in December after falling in previous months, a move that Brian Bethune, U.S. economist at Global Insight, attributed to strong demand at high-end retailers. "The upscale channels seem to be doing very well," he said. "That may have put more pressure on apparel prices toward the end of the year."

Beyond the goods sector, inflation in services has yet to show much sign of abating. Rent of shelter, a category that makes up about 40% of the core price index, rose 0.4% in December from November, and has risen at a 4.4% annualized rate over the last six months. Still, some relief could be on the way. Richard Campo, chief executive of Houston-based Camden Property Trust, which owns some 70,000 apartments across the country, says he expects rents to keep rising in 2007, but at a slower rate than in 2006.

http://www.realestatejournal.com/