Housing Starts Rose
5.3% In November

New-home construction rose, showing strength despite rising mortgage rates and higher prices for building materials, while inflation pressures at the wholesale level declined.

The Commerce Department said Tuesday that housing starts increased 5.3% to a seasonally adjusted 2.123 million annual rate last month. October starts, originally reported at 2.014 million, declined 6.6% to 2.017 million from September's 2.160 million rate. Permits for future building rose 2.5% to a 2.155 million annual rate, partially reversing the 5.2% slump posted in October.

The gains in new residential construction came despite rising borrowing costs and signs of wariness about future prospects among homebuilders. Freddie Mac reported the average rate on a 30-year fixed mortgage was 6.30% last week, compared with 5.68% a year ago. Meanwhile, a gauge of sentiment among home builders fell this month to its lowest level since April 2003, and building costs have risen amid post-hurricane rebuilding along the Gulf Coast.

"The unsold inventory of new homes is climbing and mortgage purchase application volumes are flattening," Citigroup economist Steven Wieting wrote in a note. "We believe the large drop in homebuilder sentiment in the past two months is at least consistent with a flat period for residential investment just ahead."

Housing starts rose in all regions except the South, where a 1.3% decreased was posted. Nationwide, an estimated 159,800 houses were actually started in November based on figures unadjusted for seasonal factors. An estimated 159,300 building permits were issued last month, also based on unadjusted figures.

In a separate report, the Labor Department's producer-price index for finished goods fell 0.7% on a seasonally adjusted basis last month, retracing an unrevised 0.7% increase in October. The drop was led by a sizable 4% fall in energy prices, which came after four months of gains related to higher crude-oil prices after Hurricanes Katrina and Rita caused widespread shutdowns of wells and refineries along the Gulf Coast.

However, stripping away often volatile food and energy costs, the "core" PPI increased 0.1% in November following an unrevised 0.3% decline in October. That mirrored last week's report on the consumer-price index, which showed that overall consumer prices fell 0.6% but "core" costs rose 0.2%.

Gasoline prices last month fell 10.7%, the sharpest drop since May 2003. Residential natural gas prices fell 0.5%, the biggest drop since June, while home heating-oil prices fell 15.5%, the sharpest decline since April 2003. However, residential electric power prices rose 2.3% last month.

Federal Reserve policy makers are keeping a close watch over inflation gauges as they consider when to end a long campaign to tighten monetary policy. In a statement last week accompanying its latest interest-rate increase, the Federal Reserve said that although underlying price pressures remain relatively low, higher energy prices and resource utilization "have the potential to add to inflation pressures."

Indeed, economist Stephen Stanley at RBS Greenwich Capital warned clients in a note that they should keep a watchful eye on inflation. "While increases in inputs have not fed through much to core consumer prices in 2004 and 2005, this would be the wrong time to become complacent on inflation. The turn of the year is a natural time for firms to implement price changes, and I fear that inflation will pick up in early 2006."

There was some fallback for prices in the production pipeline. Raw materials prices dropped 1.2% in November, the first decline since June, after rising 6.7% in October. Partially processed goods prices also fell 1.2% last month, the sharpest decline since April 2003, following October's 3% increase.

Food prices rose 0.5% last month after a 0.1% fall in October. Citrus fruit prices soared 35.2%, their sharpest rise since January 1999. Fresh eggs prices rose 13.4%, and fresh and dry vegetables rose 7.2%. Prices of passenger cars fell 0.8% in November after a 3.0% decline in October. Light motor trucks, which include sport utility vehicles, fell 0.8%, while heavy motor trucks were up 0.2%. Prices for pharmaceutical preparations climbed 1.6% in November.

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