- The Washington Times - Tuesday, June 20, 2006

ASSOCIATED PRESS

Construction of new homes and apartments, down for three straight months, staged what may turn out to be a temporary rebound in May.

Despite the one-month improvement, analysts said higher mortgage rates would continue to buffet the once high-flying housing market for the next two years. But they said potential home buyers could see some benefits in the form of more builder incentives being offered to move unsold inventory.

The Commerce Department reported that builders started construction at a seasonally adjusted annual rate of 1.957 million units last month, a better-than-expected 5 percent gain from April when construction had fallen 5.5 percent.

Analysts attributed the increase to an unusually dry spring in many parts of the country that allowed builders to start work on more new homes.

But they cautioned that construction activity is likely to slide further in coming months as the housing industry continues to slow, but not crash, under the impact of rising mortgage rates.

They noted that applications for new building permits, considered a good sign of future activity, fell for a fourth straight month, declining 2.1 percent to a seasonally adjusted annual rate of 1.932 million units.

“The longer term trends are downward but it is not a disaster,” said David Wyss, chief economist at Standard & Poor’s in New York. “We are not expecting a housing bust, just a housing slowdown.”

A monthly survey of builder confidence plunged in May to its lowest level in 11 years as builders expressed concerns about rising mortgage rates and whether investors who bought houses during the boom years might start dumping those properties back on the market now that prices are no longer soaring, which could further depress prices.

David Seiders, chief economist for the National Association of Home Builders, the group that conducts the survey, said that for now, builders were coping by offering incentives such as kitchen upgrades, free decks and fireplaces or paying closing costs to keep selling homes.

According to a recent survey, Mr. Seiders said, 53 percent of builders were including optional items at no cost, up from 33 percent who said they were doing so a year ago, while 42 percent were paying a part of closing costs, up from 28 percent a year ago.

Currently, the nationwide average for a 30-year mortgage is 6.63 percent, up a full percentage point from a year ago. But analysts are concerned that those rates could go significantly higher if the Federal Reserve, which has already raised rates 16 times, keeps tightening because of inflation worries. The Fed next meets on June 28-29.

“My baseline forecast is for a moderate cooldown in housing this year but there are some major uncertainties out there,” Mr. Seiders said.

He said he thought home prices, which had been climbing at double-digit rates, would slow to year-over-year gains of just 4 percent by the middle of next year, and some of the hottest markets could see price declines.

For May, construction of new single-family homes was up 2.1 percent to an annual rate of 1.586 million units while construction of multifamily units was up an even stronger 19.7 percent to an annual rate of 371,000 units.

The strength in May was led by a 15.8 percent jump in construction activity in the West. Construction rose by 8.5 percent in the South and was up by 1.7 percent in the Northeast. However, construction fell by 15.8 percent in the Midwest.

The weakness in housing has put downward pressure on the stocks of many of the country’s leading home builders, companies such as DR Horton Inc., Lennar Corp., Pulte Homes Inc. and Centex Corp., and many analysts predict that trend will continue.

“Inventories of new unsold homes are at a record high, prices are softening — forcing builders to cut prices — builder confidence is plummeting and permits are down,” said Patrick Newport, senior economist at Global Insight, a private forecasting firm. “Despite May’s good numbers, [housing] starts will continue to fall in the coming months.”

He predicted housing construction for all of 2006 would be down by 8 percent from last year, with another 8 percent drop likely in 2007.

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