Home-building boom likely a blip

U.S. housing construction showed unexpected gains in February, but economists warn that the battered sector may suffer more before hitting bottom.

The Commerce Department said Tuesday that construction of new homes and apartments jumped 22.2% in February compared with January, pushing activity to a seasonally adjusted annual rate of 583,000 units.

The positive report contributed to a stock market rally that pushed the Dow Jones industrial average up 179 points, or 2.5%, to 7396.

The gain in housing starts was the first in eight months and reflected a "modest rebound" from January — the worst month in history for new home production, says David Crowe, chief economist of the National Association of Home Builders.

Even with February's big increase, housing starts were 47% below their level the same time last year, the Commerce Department said.

February's jump was propelled by an 82% surge in multifamily construction. That was likely driven by weather, as bad storms delayed projects in the Northeast and Midwest in December and January, says Patrick Newport, economist with IHS Global Insight.

A more meaningful surprise in February's data was that building permits for single-family homes jumped 11% from the previous month, the first gain in nine months, he says. If that trend continues several months, it may signal that "housing has hit bottom," Newport says.

That's a big if, he and other economists say. IHS says housing starts and permits have further to fall, because the outlook for builders continues to deteriorate. Prices of existing homes are dropping, inventory of unsold homes remains near all-time highs and foreclosures are still increasing. If financial markets improve and banks ramp up lending, the housing market should hit bottom later this year, IHS says.

For the month, single-family home starts increased by 1.1% compared with January. They remain 80% below the peak in January 2006, says Soleil Securities equity analyst Anna Torma.

In a research note Tuesday, she warned that the slight increase is likely due to a sharp decline in January and is a "temporary reprieve." She also says starts will decline further as a result of "further deterioration in market fundamentals."

Despite the warnings, investors viewed the housing data as a glimmer of good news and snapped up shares of home builders. Lennar jumped 9% to $8.52. Pulte Homes rose 7% to $10.16, and Toll Bros. climbed 6% to $17.06.

In related news, the Labor Department reported that its wholesale price index edged up a slight 0.1% in February as a big drop in food costs offset a second monthly increase in energy prices.

The 0.1% increase in wholesale inflation was much lower than the 0.8% surge in January and smaller than the 0.4% increase economists had expected. Compared with a year ago, wholesale prices are actually down 1.3%.

Core inflation, which excludes energy and food, edged up 0.2% in February, only slightly higher than the 0.1% gain economists had expected. Core prices had risen 0.4% in January.

Only last summer, officials at the Federal Reserve had started to worry that a surge in energy costs could spread to other areas of the economy and boost inflation to unacceptable levels. But after the financial crisis struck in the fall, the Fed switched signals and is now aggressively fighting a deepening recession with no real threat of inflation.

Contributing: The Associated Press