Housing Construction Falls for 2nd Month

September 20, 2005

Associated Press

WASHINGTON -- Construction of new homes slipped for a second month in August, providing fresh evidence that the nation's housing boom may be cooling.

The Commerce Department reported that construction of new homes and apartments dropped 1.3 percent last month after a decline of 1.5 percent in July. It marked the first back-to-back declines in housing starts since early 2004.

Even with the declines, housing construction totaled 2.01 million units in August, the eighth month out of the past nine that housing has been above the 2-million mark.

Hurricane Katrina had little impact on the August data since the storm hit late in the month, but analysts predicted a more adverse impact in September, reflecting forced shutdowns of construction sites in Gulf Coast areas hard-hit by the storm.

However, rebuilding in coming months should add to activity, but not enough to overcome an expected slowdown as higher interest rates finally start to dampen one of the economy's standout performers.

"We see a flattening of housing starts and the beginning of a cooling process," said David Seiders, chief economist at the National Association of Home Builders. A survey of builder sentiment dropped in September for the third straight month to the lowest level it has seen in two years.

Seiders predicted that for all of 2005 housing construction would total 2.02 million units, up 3.6 percent from last year's pace and the best showing in more than two decades.

But for 2006, Seiders forecast housing construction would drop by 4.8 percent to around 1.92 million starts. He said he has added just 25,000 new starts to that figure to represent rebuilding from Katrina, expecting that this effort will be stretched out perhaps as long as five years.

While analysts are not forecasting a repeat of the dramatic plunge in stock prices that occurred in 2000 with the bursting of a speculative bubble in the stock market, they are looking for a slowing in price gains nationally and possibly price declines in the nation's hottest markets.

Ken Simonson, chief economist for the Associated General Contractors of America, forecast that the price of building materials such as lumber and cement will rise by 10 percent or more next year, reflecting demand pressures related to Katrina. That is up from a 6 percent to 8 percent increase in the cost of building supplies before Katrina hit.

The Bush administration has said it is considering cutting high tariffs that have been imposed on imports of softwood lumber from Canada and cement from Mexico to ease price pressures.

The country has recorded four straight years of record sales of both new and existing homes and economists believe even with a slowdown in the second half of this year, sales are still on track to set another record. They are forecasting small sales declines for 2006.

The housing boom has been powered by the lowest mortgage rates in a generation. But the Federal Reserve has been pushing short-term rates upward for the past 15 months and these gains are finally starting to show up as higher long-term mortgage rates.

Rates on 30-year mortgages rose last week to 5.74 percent and Seiders forecast the 30-year rate will continue rising gradually to 5.9 percent by the end of this year and 6.7 percent by the end of 2006.

Chart shows monthly housing starts for the past 12 months. (AP Graphic) (AP) For August, construction of new single-family homes fell by 0.5 percent to 1.71 million units while construction of multifamily units was down a sharp 6 percent to 328,000 units.

By area of the country, construction rose by 13.3 percent in the West to an annual rate of 561,000 units. All other areas of the country posted declines in August from the level of activity in July.

The area of the country with the biggest drop in activity was the South, where construction fell by 6.6 percent to an annual rate of 915,000 units. Analysts blamed this decline on unusually wet weather during the month, even before Katrina struck, which kept builders from starting work on new homes.

Construction was down 5.2 percent in the Midwest to an annual rate of 346,000 units and down 4.1 percent in the Northeast to an annual rate of 187,000 units.

Copyright Associated Press

Contact ALTA at 202-296-3671 or communications@alta.org.