Watch CBSN Live

Construction Up But Housing Slump Remains

Construction of new homes posted a small gain in April but applications for building permits plunged by the largest amount in 17 years, a dramatic sign that the nation's housing industry is still in a steep slump.

The Commerce Department reported Wednesday that construction of new homes and apartments rose by 2.5 percent in April compared to March to a seasonally adjusted annual rate of 1.528 million units.

Even with the improvement, housing construction is 25.9 percent lower than a year ago. And in a worrisome sign for the future, builders cut their requests for new construction permits by 8.9 percent in April. That was the sharpest drop since a 24 percent fall in February 1990, another period when housing was going through a significant downturn.

In other economic news, the Federal Reserve reported that industrial output rose by 0.7 percent in April, a stronger-than-expected showing that reflected a continued rebound in manufacturing and a big jump in output by the nation's utilities. Output had fallen by 0.3 percent in March.

Manufacturing increased 0.5 percent in April following a 0.6 percent rise in March, with production of autos, computers and electronic equipment showing big gains. Output at utilities surged by 3.5 percent as electric power generation during a colder-than-normal April boosted demand for energy to heat homes.

The 0.7 percent rise in overall production was more than double the 0.3 percent gain that had been expected. While analysts said the figure was heavily influenced by the big jump in utility output, they were encouraged by the broad based gains in manufacturing, which had been struggling in previous months with the overall economic slowdown.

Housing, which had enjoyed record sales in both new and existing homes for five straight years, saw the boom end dramatically in 2006 with many formerly red-hot sales areas suffering big declines in sales and prices.

The slump in housing has been a drag on the overall economy, pushing business growth down to a lackluster 1.3 percent in the first three months of this year, the weakest performance in four years.

A survey by the National Association of Home Builders released on Tuesday indicated that there are more troubles to come as builder sentiment fell to a reading of just 30, matching the low point in the current downturn set last September.

David Seiders, chief economist for the home builders, said the survey found that the rising defaults in the subprime mortgage market were adding to concerns about the ability to reduce a huge inventory of unsold new homes and causing builders to cut back on their plans.

"We're now projecting that home sales and housing production will not begin improving until late this year and we're expecting the early stages of the subsequent recovery to be quite sluggish," Seiders said.

The 2.5 percent rise in construction starts in April reflected a 1.6 percent increase in single-family homes and a 6.3 percent jump in construction of multi-family units.

By region of the country, the increase was led by a 31.3 percent surge in the Northeast and a 7.8 percent increase in the West. Construction activity was down 14.2 percent in the Midwest and 0.1 percent in the South.