Home construction reaches 25-year high

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Construction on single-family homes soared to the highest level in 25 years last month as buyers and sellers rushed to take advantage of low mortgage rates before they rose sharply higher.

The Commerce Department reported that house construction jumped 1.9 percent to an annual rate of 1.52 million. This stoked optimism among housing officials that the historical boom in housing that buoyed the economy throughout the recession is continuing despite climbing mortgage rates. Starts on all housing units, including apartment buildings, surged to a 17-year high of 1.87 million.

Many economists, however, believe the surprisingly stellar performance of housing last month is the industry's last hurrah before it settles into a more modest growth path as a result of a surge in 30-year mortgage rates from 45-year lows in June.

"The push to complete homes before mortgage rates slow the market is on, and builders are going wild," said Joel Naroff, president of Naroff Economic Advisers. "But while construction is booming right now, it might not last. ... We are experiencing the typical reaction to higher rates."

Mr. Naroff sees a less-frenzied pace of home sales and construction by the end of the year. In a sign that some builders also anticipate slower sales, the agency reported that applications for housing construction permits dropped 2.4 percent to 1.78 million.

Home sales skyrocketed to unprecedented levels in recent years, fed by extraordinary low interest rates that made homes affordable for many renters and escalating home prices that made housing the preferred investment of Americans burned by their investments in stocks.

The average mortgage rate dropped steadily from 8.5 percent in the middle of 2000 to a low of 5.25 percent in June before shooting back up in recent weeks to around 6.4 percent on signs that economic growth is picking up even as budget deficits are burgeoning to record levels.

The sudden rise in interest rates forced home builders and mortgage bankers to scale back their rosy forecasts for growth, although most continue to believe the housing market will remain sturdy in the face of higher rates. They note that home buyers should be supported by steadier growth in jobs and incomes as the economy gains strength, even if they have to pay higher rates.

"We're still at a historical low on interest rates, defining a very affordable housing market," Stuart Miller, chief executive officer of Lennar Corp., the largest home builder, told Bloomberg News yesterday. "We've got a lot of room before we start to see interest rates threatening the affordability of the home."