Housing starts fell in June, suggesting slowdown

WASHINGTON — WASHINGTON - U.S. housing starts unexpectedly fell in June to the lowest level in a year, suggesting a slowdown in residential construction due to rising interest rates. Building permits, a sign of future activity, declined the most in a decade.

Builders broke ground on homes in June at an annual rate of 1.802 million units, compared with a revised annual pace of 1.97 million units in May, the Commerce Department said.


The decline in building permits was the biggest since February 1994, when the Federal Reserve last started raising its target interest rate after a recession.

"Housing has been so very strong for so very long that there's no pent-up demand left," said Kenneth T. Mayland, president of Clear View Economics in Pepper Pike, Ohio.


Mayland's June forecast of an annual rate of 1.87 million units was the lowest in a Bloomberg News survey.

The decline adds to evidence "something rippled through the economy in June and it was pretty pervasive," he said.

Fed Chairman Alan Greenspan told lawmakers yesterday that "housing starts, which have come up at an extraordinary pace in recent years, are very likely to shade lower over the next couple of years. It's hard to maintain the pace that we're maintaining. But we do not expect that the falloff will be abrupt."

The average 30-year fixed mortgage rate has risen by almost a full point in a year. Still, even economists who say construction will slow don't expect future declines as steep as June's.

"As rates move higher, a steady decline in activity is more likely than a series of sharp declines," said Drew Matus, senior economist at Lehman Brothers in New York. Economists at Lehman say housing starts will decline about 15 percent over the next year.

Rain a factor

Construction, which in 2003 was the strongest in 25 years, may also have been hampered by rainy weather last month.

Housing starts were forecast to rise to an annual rate of 1.99 million in June, from 1.967 million initially reported for May. The June pace was the slowest since May 2003. Starts averaged 1.85 million at an annual rate last year.


The number of homes authorized but not yet started increased 10 percent in June to 202,100, the most since April 1987, suggesting that builders' backlogs still are widening, Commerce Department data showed.

New-home sales in May were at a record pace. Incomes have been increasing on the heels of a 1.3 million rise in employment so far this year.

Home sales are "driven by job growth, median income growth and the economy doing well because that creates positive consumer confidence," said Donald J. Tomnitz, chief executive of D.R. Horton Inc., the No. 3 U.S. homebuilder by market value. Horton's sales rose 23 percent in the second quarter.

Building permits fell 8.2 percent last month to a 1.924 million annual pace. Starts of single-family homes fell 9.5 percent in June to a 1.489 million-unit rate after a 1.645 million pace a month earlier. Starts of townhouses, apartments and other multifamily dwellings fell 3.7 percent to a 313,000 annual rate.

By region, starts fell 17 percent in the West to 476,000 at an annual pace; 12 percent in the Midwest to 315,000; 3.5 percent in the Northeast to 165,000; and 3.1 percent in the South to 846,000.

Wet June


Rainfall averaged 7.46 inches in the South last month, the wettest June since record-keeping began in 1895, according to the National Climatic Data Center. More than 3.5 inches of rain fell on the nation last month, the seventh-wettest June on record.

"Extremely wet weather in the South likely hindered construction activity," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn.

The number of houses already under construction in June fell 0.7 percent to an annual rate of 1.221 million units. June housing completions dropped 3.9 percent to 1.848 million units at an annual pace. Single-family completions rose 1.5 percent to 1.534 million.

Residential construction accounts for about 5 percent of the value of all goods and services produced in the United States.

Housing-related spending on such items as furniture and appliances also contributes to growth. Furniture sales rose 1.1 percent in June, the Commerce Department said in its retail report.

Home construction added 0.24 percentage point to the first-quarter economic growth rate of 3.9 percent, Commerce Department figures show. In the fourth quarter, when the economy expanded at a 4.1 percent annual rate, it contributed 0.4 percentage point.


Demand for homes has held up as mortgage rates rose. The average rate on a 30-year fixed mortgage was 6.29 percent in June compared with May's 6.27 percent, according to statistics from Freddie Mac, the second-biggest U.S. purchaser of mortgages.

Sales of new and existing homes probably will total 7.33 million this year, Freddie Mac said last week. That exceeds last year's record 7.19 million.