By Shobhana Chandra May 18 (Bloomberg) -- Builders in April broke ground on more U.S. homes than anticipated as buyers took advantage of a tax credit before its expiration. Housing starts rose to a 672,000 annual rate last month, the highest since October 2008 and up 5.8 percent from March, Commerce Department figures showed today in Washington. Building permits, a sign of future construction, dropped to the lowest level in six months. Demand that was bolstered by a government incentive of as much as $8,000 helped reduce the number of unsold new houses to the lowest level since 1971 and encouraged builders to take on more projects. The slump in permits indicates that sustained gains in the weakest part of the economy will require job creation and fewer foreclosures that have pushed down prices. “We think the pace of the housing recovery will be modest at best,” said Jonathan Basile, an economist at Credit Suisse in New York, who forecast April starts at a 670,000 pace. “It’s encouraging to see starts gain some traction but the decline in permits takes some of the luster off.” Building permits fell 12 percent to a 606,000 annual rate in April. Housing starts were revised up in March to a 635,000 annual pace. Producer Prices Wholesale prices in the U.S. unexpectedly dropped in April for the second time in three months, signaling the economic recovery has yet to boost inflation. The 0.1 percent decrease in prices paid to factories, farmers and other producers followed a 0.7 percent March rise, the Labor Department said today in Washington. Excluding food and fuel, so-called core prices climbed 0.2 percent, compared with 0.1 percent increases in the prior two months. Stock-index futures held earlier gains after the reports as concern eased that the measures aimed at reducing fiscal deficits in Europe will hamper growth. Futures on the Standard & Poor’s 500 Index expiring in June rose 0.7 percent to 1,142.8 at 8:44 a.m. in New York. Treasury securities were little changed. Starts were forecast to rise to a 650,000 annual rate, according to the median projection of 77 economists surveyed by Bloomberg News. Estimates ranged from 620,000 to 700,000. Today’s report included annual revisions from the Commerce Department. Permits were projected to hold at a 680,000 annual rate, matching the pace in March that was the highest since October 2008, according to the survey median. April Last Year Starts rose 41 percent in April from the same month last year, the biggest year-over-year gain since 1994, while permits increased 16 percent. Construction of single-family houses increased 10 percent to a 593,000 rate in April, while permits fell 11 percent. Work on multifamily homes, such as townhouses and apartment buildings, dropped 19 percent to an annual rate of 79,000. Three of four regions had an increase in starts last month. The gain was led by a 24 percent jump in the Northeast. Starts rose in the South and Midwest and fell in the West. The tax credit for first-time homebuyers, extended in November to include some current owners, required contracts be signed by April 30 and settled by June 30. Sales of new homes surged in March by the most since 1963, while purchases of existing homes rose for the first time in four months. The jump in sales brought the number of new houses for sale down to 228,000, the lowest since March 1971, allowing builders more room to begin projects even as they compete with foreclosed homes coming back on the market. Home Foreclosures Home repossessions rose to a record level in April while foreclosure filings dropped, signaling mortgage lenders are working off a backlog of seized properties, RealtyTrac Inc. data showed last week. Homebuilders turned less pessimistic in May, a report showed yesterday. The National Association of Home Builders/Wells Fargo confidence index rose to the highest level since August 2007, data from the Washington-based group showed. As the effects of the tax credit fade, a sustained recovery in housing will depend on a pickup in the labor market. Employment has increased four straight months, including an April gain that was the biggest in four years. At the same time, economists project the unemployment rate will end the year above 9 percent, according to a Bloomberg survey this month. Pulte Group Inc., the largest U.S. homebuilder by revenue, is among companies waiting for signs that the improvement in housing will last beyond the end of the government assistance. Recover ‘At Hand’ “The U.S. housing industry is finding, and may have already found, a bottom, but that’s different from saying that a recovery is at hand,” Richard J. Dugas, Pulte’s chairman and chief executive officer, said on a conference call with analysts on May 5. Businesses benefiting from steadying demand include Lowe’s Cos., the second-largest U.S. home-improvement retailer, which posted a first-quarter profit as sales advanced. The Mooresville, North Carolina-based company raised its full-year earnings forecast. “Caution remains, but a growing sense of comfort has more consumers planning and executing discretionary projects and purchases,” Chief Executive Officer Robert Niblock said on a conference call yesterday. To contact the reporter on this story: Shobhana Chandra in Washington schandra1@bloomberg.net

Source