Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, November 19, 2009
October housing starts unexpectedly dropped a sizeable 10.6% to an annualized 529,000 units from 592,000 in September. Expectations going into the report had been for starts to rise modestly by 1.7% to an annualized 600,000. It is possible that with an $8,000 first-time homebuyer subsidy expected to terminate the end of November, builders started to cut back construction activity in anticipation of weakening demand. Congress has recently extended this program to the end of April and has even expanded the program to existing home owners, which bodes well for some of the weakness to reverse in November.
The weakness in housing starts was relatively broadly based. By type of housing unit, single detached homes dropped by 35,000 (6.8%) while multiple units were off 28,000 (34.6%). By area of the country, all major regions fell in October led by an 18.8% drop in the Northeast followed by the Midwest (10.6%), the South (9.6%) and the West (8.5%). Permits also dropped, although by a more moderate 4% to an annualized 552,000.
The drop in starts is disappointing as most other housing market measures have been pointing to improving conditions, although the weakness may have been related to an expected ending of the new home buyer program. However, this report clearly reminds the Fed that the economy is not as yet out of the woods and that policy will need to remain accommodative. Thus, we expect that Fed funds will be held at its current low range of 0% to 0.25% until the fourth quarter of 2010.
Consumer prices — In a separate report out this morning, consumer prices for October rose by a slightly greater-than-expected 0.3% compared to an expected rise of 0.2% going into the report. Similarly, core prices rose 0.2% rather than increasing by a more moderate 0.1%. However, on a year-over-year basis, today’s report suggests little inflation pressure in the system with the overall measure down 0.2% and the core measure up only 1.7%. The overall annual rate is up from -1.3% in September and reflects the fact that sizeable gasoline price declines a year ago are not being repeated this year. In fact, the annual rate of increase will likely continue to drift higher through December as the earlier gasoline price declines extended through the end of 2008.
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