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A new home is seen under construction in Los Angeles, Ca., U.S. July 30, 2018.

LUCY NICHOLSON/Reuters

U.S. home building fell less than expected in January while permits surged to a near 13-year high, pointing to sustained housing market strength that could help keep the longest economic expansion in history on track.

Other data on Wednesday showed producer prices increasing by the most in more than one year last month, boosted by rises in the cost of services such as health care and hotel accommodation. The reports could support the Federal Reserve’s desire to keep interest rates unchanged at least through this year after lowering borrowing costs three times in 2019.

“The economy looks good with residential home building activity beating expectations and a little more producer price inflation, even if the data overstate how well the country is doing in terms of generating the growth and inflation the Federal Reserve wants to see,” said Chris Rupkey, chief economist at MUFG in New York.

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Housing starts dropped 3.6 per cent to a seasonally adjusted annual rate of 1.567 million units last month, the Commerce Department said. That followed three straight monthly increases.

Data for December was revised up to show home building rising to a pace of 1.626 million units, the highest level since December 2006, instead of surging to a rate of 1.608 million units as previously reported.

Economists polled by Reuters had forecast housing starts falling to a pace of 1.425 million units in January. Housing starts jumped 21.4 per cent on a year-on-year basis in January. An estimated 1.291 million housing units were started in 2019, up 3.3 per cent compared to 2018.

Building permits soared 9.2 per cent to a rate of 1.551 million units in January, the highest level since March 2007, lifted by gains in both single- and multi-family housing segments.

The housing market remains on solid footing, supported by the lowest mortgage rates in more than three years. Though housing accounts for about 3.1 per cent of gross domestic product, it has a giant footprint on the economy. Housing market stability could help to keep the economic expansion, now in its 11th year, on course, amid risks from the coronavirus, slowing consumer spending and weak business investment.

A survey on Tuesday showed confidence among home builders hovering near a two-year high in February. But builders continued to complain that “a shortage of construction workers and a dearth of lots are hindering the production of affordable housing in local communities across the nation.”

The 30-year fixed mortgage rate is at an average of 3.47 per cent, the lowest since October 2016, according to data from mortgage finance agency Freddie Mac.

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“Housing is proving to be a solid link in a cooling economy,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York.

The data and a slowdown in the number of new reported cases of coronavirus helped to lift the dollar against a basket of currencies. Stocks on Wall Street were trading higher, with the S&P 500 and the Nasdaq hitting new highs. U.S. Treasury prices slipped.

PRODUCER PRICES RISE

A separate report from the Labor Department on Wednesday showed the producer price index for final demand jumped 0.5 per cent last month, the largest gain since October 2018, after climbing 0.2 per cent in December. In the 12 months through January, the PPI advanced 2.1 per cent, the biggest increase since May, after rising 1.3 per cent in December. Economists had forecast the PPI gaining 0.1 per cent in January and rising 1.6 per cent on a year-on-year basis.

Data last week showed consumer prices excluding the volatile energy and food components picking up in January. That together with the firmer producer price readings led economists to expect a rise in the inflation measure tracked by the Fed for its 2 per cent inflation target. Economists are forecasting that the core personal consumption expenditures (PCE) price index gained 0.2 per cent in January, which would lift the annual increase to 1.7 per cent.

The core PCE price index rose 1.6 per cent on a year-on-year basis in December. It undershot its target in 2019. January PCE price data will be published next Friday.

“This should raise Fed official confidence that underlying core PCE is running around 2.0 per cent, limiting the potential for (rate) cuts on a low inflation concern,” said Andrew Hollenhorst, an economist at Citigroup in New York. “Still, any ’significant, persistent’ overshoot of 2.0 per cent remains very unlikely, meaning rate hikes in 2020 are all-but-ruled-out.”

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The housing report from the Commerce Department showed single-family home building, which accounts for the largest share of the housing market, fell 5.9 per cent to a rate of 1.010 million units in January. Single-family starts raced to a 1.073 million-unit pace in December, the highest level since June 2007. Single-family housing starts accelerated in the Northeast and West, but tumbled in the Midwest and the populous South.

Single-family housing building permits rose 6.4 per cent to a rate of 987,000 units in January, the highest level since June 2007.

Starts for the volatile multi-family housing segment rose 0.7 per cent to a rate of 557,000 units last month, with those for buildings with five or more units at levels last seen in July 1986. Permits for the construction of multi-family homes vaulted 14.6 per cent to a rate of 564,000 units, and those for buildings with five or more units hit their highest level since June 2015.

While housing completions dropped 3.3 per cent to a rate of 1.280 million units last month, the stock of homes under construction rose 1.3 per cent to 1.203 million units, the highest level since February 2007. This could help alleviate a shortage of homes for sale that is keeping home prices elevated.

Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap.

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