Housing Starts Probably Slumped in July: U.S. Economy Preview

By Shobhana Chandra

Aug. 17 (Bloomberg) -- U.S. builders began work in July on the fewest houses in 17 years and the economic outlook dimmed, indicating the real-estate slump is at the epicenter of the growth slowdown, economists said before reports this week.

Housing starts plunged 9.9 percent to an annual rate of 960,000, according to the median estimate in a Bloomberg News survey ahead of a Commerce Department report on Aug. 19. The Conference Board's index of leading indicators probably fell 0.2 percent last month, a third consecutive drop.

Stricter lending rules, rising borrowing costs, falling property values and record foreclosures may further depress home sales and cause builders to keep retrenching. Housing, job losses and the credit crisis are likely to weaken the economy for the rest of the year and into 2009.

``There's no underlying support for the housing market,'' said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. ``The economy as a whole is in fairly poor shape.''

The leading indicators index, a measure of the economy's likely path over the next three to six months, is due for release on Aug. 21.

Commerce's housing report may also show building permits, a sign of future construction and a component of the leading index, fell 15 percent last month, according to the Bloomberg survey.

A change in New York City's building code that took effect July 1 caused housing starts and permits to unexpectedly surge in June as builders broke ground ahead of the new regulations.

The magnitude of the projected July drop in starts and permits reflects, in part, ``a payback from the big jump'' the month before, York said.

Sales Fall

Underneath the gyrations, demand continues to weaken. Existing home sales fell to a 10-year low in the second quarter and the median price for a single-family house slid 7.6 percent, according to the National Association of Realtors. A third of all sales were foreclosures or ``short sales,'' in which lenders take a loss on a property.

To make matters worse, financing is also becoming scarce, a quarterly survey of banks by the Federal Reserve showed. Three- fourths of the loan officers polled reported they tightened standards on prime mortgage loans, up from the April survey. Lending rules on non-traditional loans were also toughened.

The five largest U.S. homebuilders reported a combined $1.08 billion in losses in their most recent quarters.

Record Pessimism

Builders are understandably downbeat as the losses mount. The National Association of Home Builders/Wells Fargo's sentiment index may show optimism held at a record low in August for a second month, economists forecast a report tomorrow will show.

Still, construction companies are making some headway in reducing the supply glut. The number of new homes for sale dropped in June by the most in four decades.

Some firms are seeing an improvement. Toll Brothers Inc., the largest U.S. luxury homebuilder, reported cancellations last quarter dropped to the lowest level in more than two years, and said buyers are starting to return to the market.

``There is growing pent-up demand from those who have postponed buying during the past almost three years,'' Chief Executive Officer Robert Toll said on an Aug. 13 conference call.

Finally this week, a Labor Department report Aug. 19 may show wholesale costs rose at a slower pace last month as fuel expenses peaked. The producer price index probably climbed 0.5 percent in July after jumping 1.8 percent the prior month, according to economists surveyed.

                         Bloomberg Survey

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                       Release    Period    Prior     Median
Indicator                 Date               Value    Forecast
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NAHB Housing Index        8/18      Aug.       16        16
PPI  MOM%                 8/19      July      1.8%      0.5%
Core PPI MOM%             8/19      July      0.2%      0.2%
PPI  YOY%                 8/19      July      9.2%      9.2%
Core PPI YOY%             8/19      July      3.0%      3.2%
Housing Starts ,000's     8/19      July      1066      960
Building Permits ,000's   8/19      July      1138      970
Initial Claims ,000's     8/21    Aug. 16     450       440
Cont. Claims ,000's       8/21     Aug. 9     3417      3404
Philly Fed Index          8/21      Aug.     -16.3     -14.0
LEI  MOM%                 8/21      July     -0.1%     -0.2%
================================================================

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net