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Analysts unworried by lower housing starts, higher producer prices

WASHINGTON—New housing starts fell 17.6 percent in March, the biggest monthly drop in more than 14 years, fueling fears that the nation's four-year housing boom may be slowing.

The housing numbers, which the Commerce Department released Tuesday, came as the Labor Department announced that producer prices shot up 0.7 percent in March, largely because of soaring energy costs.

There was good news in Tuesday's bad news, however. Higher energy costs accounted for virtually all the rise in producer prices, and because the housing and inflation numbers point to an economic slowdown, they may make it less likely that the Federal Reserve will raise interest rates aggressively next month. That would keep lending rates low, allowing the housing boom to continue.

Wall Street rebounded somewhat on Tuesday's news. After losing 436 points in four successive days, the Dow Jones industrial average rose 56.16, or 0.6 percent, to close at 10127.41. The Standard & Poor's 500 index also was up 0.6 percent, or 6.80 points, and the Nasdaq composite index closed up 19.44, or 1 percent, at 1932.36.

Tuesday's housing-start numbers aren't as bad they appear, said David Wyss, the chief economist for the credit-rating agency Standard & Poor's in New York. The drop followed monthly numbers that were at 20-year highs, he said, and much of the nation saw unusually wet or cold weather in March, slowing building.

"It's too early to get excited about this. You are coming off huge numbers in January and February," Wyss said, noting that although housing starts fell, applications for home-construction permits were higher than in March 2004. "When permits and starts are oscillating differently, then it's probably weather-related."

Economists are paying close attention to housing numbers because of widespread fears that housing prices are inflated and could put the economy at risk. Home prices rose 32.4 percent on average nationwide from 2000 to 2004, and many economists think today's housing market resembles the overheated stock market of the late 1990s, which collapsed.

The National Association of Home Builders in Washington saw the March numbers as an aberration.

"There really are temporary factors in that big decline," said David Seiders, chief economist for the association. He expects that a backlog of permits will result in sharp gains in April's new starts.

The National Association of Realtors still projects a banner year for sales of new and existing homes.

"We're projecting starts to have their best performance since 1978," said spokesman Walter Molony, expecting a 1.4 percent increase in 2005 to 1.98 million new-home starts.

Realtors also expect sales of existing homes—which account for 85 percent of home sales—to be the second best on record. The association gauges future home sales with its Pending Home Sales Index, and the latest reading, published April 4, showed a 2.2 percent increase in expected home sales for March. Translation: The boom continues.

The biggest threat to the U.S. economy and home sales is rising oil prices and their potential to spark inflation. Interest rates rise or fall partly in response to the threat of inflation, so oil prices and inflation threaten the housing market's health.

The Labor Department said its Producer Price Index—a measure of the wholesale prices that farmers, factories and refineries pay—rose 0.7 percent in March, the biggest jump in five months. A 5.3 percent gasoline-price increase in March drove the hike. Energy prices rose 3.3 percent overall. The numbers showed oil's inflationary shock waves spreading across the U.S. economy.

But the monthly numbers also showed that core inflation—the measure of prices excluding energy and food—rose only 0.1 percent last month. That suggests inflation is in check, except for oil prices.

With core inflation appearing to be under control, Federal Reserve bankers are unlikely to seek an aggressive half-point interest-rate hike when they meet next month. Just a week ago, many economists and investment analysts speculated that the Fed would seek a half-point increase to quell the threat of inflation. Higher interest rates would lead to higher mortgage rates and lower home sales.

Sharp rate hikes also would reverberate on Wall Street. Reflecting investors' fears of inflation and a slowing economy, the three leading American gauges of stocks—the Standard & Poor's 500-stock index, the Dow Jones industrial average and the Nasdaq composite index—all fell by more than 3 percent last week.

Mindful of a nervous Wall Street, the Fed is likely to forgo aggressive interest-rate hikes.

"With this weaker (stock-market) data, that sort of clinches it," said William Dudley, chief economist for the investment bank Goldman Sachs in New York.

That's good news for housing. A modest pace of interest-rate hikes is likely to keep mortgage rates under 7 percent in 2005. That's low by historical standards, and should keep the housing boom alive.

After rising above 6 percent in late March, the benchmark 30-year fixed mortgage rate fell for two consecutive weeks in April and stands at 5.91 percent, according to mortgage giant Freddie Mac.

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Housing start data is available at www.census.gov/indicator/www/newresconst.pdf.

The Producer Price Index is available at www.bls.gov/news.release/ppi.nr0.htm.

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(c) 2005, Knight Ridder/Tribune Information Services.

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