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New home construction sinks 10%

By Julianne Pepitone, staff reporter

NEW YORK (CNNMoney.com) -- The government reported Wednesday that new home construction fell sharply in May -- the first month after a homebuyer tax credit expired.

Housing starts fell 10% from April to a seasonally-adjusted annual rate of 593,000 last month, the Commerce Department said.

Economists were expecting housing starts to fall to only 655,000. On a year-over-year basis, starts rose 7.8% from May 2009.

New construction of single-family homes, the key sector of the housing market, plummeted 17.2% over the month to an annual rate of 468,000.

The annual rate for new construction of multi-family homes -- buildings with 5 or more units -- was 112,000.

April was the last month in which first-time home buyers could qualify for a federal tax credit of up to $8,000. Earlier this year lawmakers extended the deadline through April 30 and added a new credit of up to $6,500 for some existing home owners who move.

Forecasts were too optimistic given the tax credit's expiration, said Ian Shepherdson, economist at High Frequency Economics, in a research note.

"The tax credit pulled housing transactions and construction activity forward into the spring from the summer," Shepherdson said, "so the next few months will see activity remaining at a very low level."

Housing starts will probably drop "a bit further" in June, Shepherdson added, though he expects activity "to begin reviving, gradually, in the fall."

Building permits: That's likely why applications for building permits, a gauge of future construction activity, also fell sharply. Permits fell to a seasonally adjusted annual rate of 574,000 last month, down 5.9% from a revised 610,000 in April.

Economists were expecting a more modest decline to 631,000 permits. Despite this month's sharp drop, permits were up 4.4% from May 2009.

Last week, a Senate amendment was unveiled that proposes extending the tax credit deadline to Sept. 30. To top of page

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