- The Washington Times - Tuesday, April 19, 2005

Housing construction plummeted by 17.6 percent last month — the most in 14 years — as rising interest rates and gloomy weather took their toll on the red-hot real estate market, the Commerce Department reported yesterday.

The unexpectedly sharp drop in new-home construction starts to a 1.84 million annual rate shows the sensitivity of the housing market to an uptick in mortgage rates, which rose by a half percentage point last month at the coaxing of Federal Reserve Board Chairman Alan Greenspan.

After five years of boom conditions, many market observers believe housing is in an unsustainable bubble that could burst abruptly in the face of higher rates. Even industry boosters say the market is due for a slowdown this year.

“Home sales and prices are starting to slow” as rates rise and the demand for housing by baby boomers — who are past their peak home-buying years — wanes, said Harry S. Dent, a Wall Street forecaster who heads his own firm.

The lowest interest rates in a generation are the reason housing has remained “affordable” in spite of skyrocketing rents and home valuations, analysts say. They also have sparked a cottage industry of investors buying second homes and rental properties.

The speculative buying “is the real secret to the ongoing strength in the housing market,” Mr. Dent said.

But speculators will be discouraged by rising rates, the slowdown in housing sales and price gains, and will stop boosting the market, he said.

As speculation is wrung out of the market, “home prices will slow markedly, flatten or decline modestly between the fall of 2005 and the summer of 2006,” he predicted. “Prices should fall the most in overvalued markets like California, the Northeast and Southeast Florida.”

The National Association of Home Builders said the steep falloff in construction last month reflected poor weather and caution by home builders, who do not want to create an overhang of new homes for sale in the face of slowing demand.

“Many companies are taking steps to limit sales to speculators,” said Dave Wilson, Idaho home builder and president of the association.

While last month’s fall in housing starts from a 21-year high of 2.23 million in February was surprising, a smaller decline of 4 percent in permits to build new homes suggests that construction will remain solid this year, he said.

The abrupt downshift in housing occurred after February testimony by Mr. Green-span, who said that long-term interest rates, including those on mortgages, should be substantially higher given the rise in short-term interest rates engineered by the Fed since June.

Largely In response to his comments about the rate “conundrum,” the average rate on 30-year mortgages — which had been hovering near 30-year lows for nearly two years — edged briefly over 6 percent.

Since last month, however, interest rates have fallen back again, sparking a revival of home sales just in time for the spring and summer peak selling season, according to local real estate agents.

The frenzy of sales to people seemingly desperate to buy homes in recent years has sparked a variety of abuses, ranging from sellers hiding major home defects to lenders arranging kickbacks from in-house title companies, according to the National Association of Exclusive Buyer Agents.

One of the most abusive practices, the group said, is the advent of interest-only loans offered at rates of “unbelievably low” 1 percent to 2 percent for the first five or 10 years. Those loans enable marginal buyers to qualify for homes they otherwise could not afford, but the monthly payments skyrocket when the principal is added in the final years of the loan.

“Buyers should be careful of deals that sound too good to be true,” said Casey Crane of the association, noting that “you will not gain any equity in your home” during the early years.

In the scramble to stretch resources and purchase homes, other buyers are opting for adjustable-rate mortgages, which carry lower rates than 30-year loans but which are pegged to such measures as the prime lending rate that are rising steadily as a result of the Fed’s inflation-fighting campaign.

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