Housing starts post sharp rebound

Groundbreaking activity for new homes increased 2.8 percent to a seasonally adjusted annual rate of 591,000 units, reversing the prior month's weather-induced drop, a report from the Commerce Department showed on Wednesday.

Analysts had expected housing starts to rise to a 580,000-unit pace. December's housing starts were revised upwards to 575,000 units from the previously reported 557,000. Compared to January last year, starts surged 21.1 percent, the largest increase since April 2004.

"It's a positive surprise on all fronts and shows that overall demand has moved higher. That's an important element to watch as we move through a cycle going from incentive-based to more organic growth," said Craig Peckham, equity trading strategist at Jefferies & Co in New York.

In a separate report, the Federal Reserve said U.S. industrial production rose 0.9 percent, with manufacturing, mining and utilities all posting gains.

U.S. stocks opened higher, while Treasury debt prices extended losses on the report.

Economists and investors are watching for any sign that the economy may be losing steam after a surprisingly strong finish to 2009.

The housing market has been a particular area of concern after a series of disappointing reports on December home sales. Some economists worry that with the Fed -- the U.S. central bank -- and the Treasury ending purchases of mortgage-related securities in the coming weeks, mortgage interest rates will rise, putting additional pressure on the still weak market.

WINTER WOES

John Canally, an economist with LPL Financial in Boston, pointed out that January's housing starts were helped by clear weather after a stormy December. He said February "is going to be a disaster for housing" because of a series of snowstorms that battered the U.S. Northeast, hampering construction.

That December weather had also played a role in industrial production, boosting output at utilities. January's report showed broader gains, with advances across all major categories.

Capacity utilization, a measure of slack in the economy, rose to 72.6 percent from 71.9 percent a month earlier, but was still 8 percentage points below the average from 1972 to 2009, the Fed said.

In housing, groundbreaking for single-family homes rose 1.5 percent last month to an annual rate of 484,000 units after falling 3 percent in December. Starts for the volatile multifamily segment increased 9.2 percent to a 107,000-unit annual pace after rising 12.6 percent in December.

The housing market, which is at the core of the most painful economic downturn since the Great Depression, is crawling out of a three-year slump, supported by government programs. New home construction contributed to economic growth in the third quarter of 2009 for the first time since 2005.

But activity slowed sharply in the fourth quarter and while homebuilder sentiment edged up this month, it remains at levels consistent with poor conditions.

Even with mortgage rates near record lows, demand for home loans remains lethargic. Mortgage applications dipped 2.1 percent, while refinancing slipped 1.2 percent, the Mortgage Bankers Association said in a separate report.

Housing starts peaked at a 2.273 million unit annual pace in January 2006 and bottomed at 479,000 units last April. They have been bouncing around between 500,000 and 600,000 units.

New building permits, which give a sense of future home construction, fell 4.9 percent to 621,000 units last month after rising to a 14-month high of 653,000 in December, the Commerce Department said. That compared to analysts' forecasts for 620,000 units.

The inventory of houses under construction fell 2.3 percent to a record low 503,000 units last month, while units authorized but not yet started eased 0.9 percent to 94,300.

A separate report from the Labor Department showed import prices rose 1.4 percent in January, led by a jump in prices for natural gas and other fuels. Export prices gained 0.8 percent in January after a 0.6 percent rise in December.

Analysts surveyed before the report had expected import prices to rise 0.9 percent and export prices to rise 0.4 percent.

(Reporting by Lucia Mutikani, Emily Kaiser and Doug Palmer; Editing by Andrea Ricci and James Dalgleish)