US Housing Starts Post Another Solid Gain in April, Permits Fade

Housing starts rose 5.8% in April to 672,000 at an annualized rate, beating expectations for a 650,000 annualized pace. This marked the second consecutive month of decent increases with March's level revised up to 635,000 (from 626,000) although February's pace was revised lower to 605,000 from 616,000. Permits, however, softened to 606,000 at an annualized rate, 11.5% lower than in March.

Starts of single-detached homes increased by 10.2% to 593,000 while multiple-units starts slipped by 18.6% to 79,000 from 97,000 in March.

The increase in single-unit starts followed a healthy 33.9% annualized gain in the first quarter of 2010. Multiple-unit starts continue to show a see-saw pattern in the early part of 2010. Gains were reported in all areas except the West where starts slipped by 13.3% in April. The permits data showed broad-based declines with only the Midwest holding steady.

After posting strong gains in two of the previous three quarters, today's housing starts report sets the stage for another increase. While home sales activity numbers have yet to be reported for April, sharp increases were reported in March. Furthermore, homebuilders' confidence improved markedly in both April and May. This month, the index rose to its highest level since August 2007 after posting the largest one-month gain in a year in April. These improvements in sentiment augur well for housing activity to hold up despite the government's homebuyers’ tax incentive program expiring at the end of April.

The data suggest that the worst for the housing market has likely passed with rising employment during past months and still-low mortgage rates lending support to activity. The pace of recovery, however, will likely be plodding because the market faces a heavy oversupply of homes to be sold and the drop in permits in April points to slower construction activity ahead. On balance, the nascent signs of recovery in the housing market but still-muted inflation pressures, as indicated by the very low level of core producer prices reported today, set up the Fed to keep to the sidelines with the Fed funds rate likely to stay in the current range of 0.00% to 0.25%. Should the recovery's momentum continue to build as we expect, we expect the Fed to start to remove accommodation via higher interest rates late this year.

In the Producer Price Index report, PPI slowed to 5.5% with prices slipping 0.1% in April, contrary to expectations for a 0.1% increase, although this was in line with RBC's forecast for a monthly decline. The core measure, which takes out food and energy-price movements, rose 0.2% in April and prices were 1.0% higher than a year earlier. Food and energy prices both dipped in April although prices for passenger cars, capital equipment and pharmaceutical preparations firmed.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.