New Home Construction Posts Biggest Decline in 14 Years Tuesday April 19, 5:26 pm ET By Martin Crutsinger, AP Economics Writer New Home Construction Posts Biggest Decline in 14 Years; Wholesale Inflation Shoots Up
WASHINGTON (AP) -- Construction of new homes and apartments plunged by 17.6 percent in March, the biggest decline in 14 years and another possible indication that rising interest rates are beginning to take a toll on the economy. Meanwhile, wholesale inflation shot up 0.7 percent as energy prices soared.
The Commerce Department reported Tuesday that builders started construction on new homes and apartments at a seasonally adjusted annual rate of 1.84 million units in March, down from 2.23 million units in February.
Analysts had been expecting a decline in housing, but the steepness of the drop, the biggest plunge since January 1991, caught them by surprise.
"This is a bit of a shocker," said David Seiders, chief economist for the National Association of Home Builders. "But I don't think this represents a fundamental downshift in the housing market. There were special factors behind it."
Analysts blamed unusually wet weather in March, which hampered construction activity in some parts of the country, and seasonal adjustment factors that had inflated activity in the previous two months of unseasonably mild weather in many parts of the country.
But many analysts said they believed the housing report could be signaling a peak for the red-hot housing market, with declines expected in the months ahead as higher mortgage rates put a damper on an industry that has posted four straight years of record sales figures for both new and existing homes.
Kathleen Bostjancic, an economist at Merrill Lynch, noted that the drop in housing starts was the fourth indicator for March to show a loss in momentum for the economy. Employment growth, retail sales, manufacturing production and now housing have all shown disappointing results.
Analysts said all of these reports taken together implied the economy was losing some steam under the impact of higher interest rates and the recent surge in energy prices.
The Labor Department said the 0.7 percent increase in its Producer Price Index, designed to track inflation pressures before they reach the consumer, was the largest gain in five months. It was led by a 3.3 percent increase in energy prices, reflecting soaring global oil prices that have pushed the cost of gasoline for U.S. motorists to around $2.28 per gallon.
However, outside of the volatile energy and food sectors, inflation at the wholesale level rose by just 0.1 percent in March.
Wall Street hailed this moderate gain in so-called core inflation. The Dow Jones industrial average finished the day up 56.16 points at 10,127.41, after four straight losing sessions that had shaved 436 points from the Dow.
The 3.3 percent jump in energy costs was the biggest advance since a 5.7 percent rise last October. It reflected a 5.3 percent increase in gasoline prices, the biggest jump since a 12.8 percent rise in gasoline prices last October. Home heating oil prices were up 15.7 percent while residential natural gas prices rose by 2.3 percent.
Food costs were up 0.3 percent in March following a much larger 0.8 percent advance in February. Last month's increase was driven by a 10.1 percent jump in vegetable prices including big gains for spinach, squash, lettuce, snap beans and tomatoes.
Outside of food and energy, the moderate 0.1 percent advance in core inflation followed a similar 0.1 percent increase in February. Auto prices were down 0.2 percent while computer prices fell by 3.4 percent.
The report on housing construction showed that construction was down in all parts of the country led by a 29.3 percent drop in the Midwest, an 18 percent decline in the South, a 12.7 percent fall in the West and a 3.6 percent decline in the Northeast.
The reason I say that is that the BCA site is where I went for the explanation of the methodology, and when I applied it to one of the price points on the iqAuto site, I came up with exactly the value that iqAuto displayed on their chart for that price point. (IqAuto has a page where you can access their raw source data which makes it possible to do this.)
"In other words, the iqauto system counts QQQQ May 52 puts even though it is quite unlikely the index will trade at that range between here and May expiration."
I thought you were concerned about far out-of-the-money options. If you want to talk about deep in-the-money ones, then the fact that the index is unlikely to trade at that strike does not mean that they don't affect the option writers' bottom line. On the contrary, they have an immediate effect on their unrealized gains or losses every time the market moves by even a penny. Here's why:
The current financial liability to writers of in-the-money options at each strike price is determined by taking the difference between the strike price and the current market price of the underlying security, multiplying by the number of options outstanding at that strike, and multiplying by 100 (since each option is for 100 shares of the underlying security). The implication of this is that every time the market price changes by one dollar, the financial liability to the writer of that option changes by $100 times the number of options written at that strike. Thus, the far in-the-money options have a very real effect on the bottom line for options writers as the market price moves, creating an incentive for them to try to do something about it.
If you find that you get better results in your market prognostications by eyeballing the raw number of options near the crossover point, I'm certainly not going to challenge that. All I'm saying is that it is an empirical observation, and is not explained by the use of deep in-the-money options in the Max Pain calculations.
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