Friday, December 17, 2004

Home Building Gets Hammered


November Plunge Was Biggest In A Decade; Analysts Wonder Whether It Was Just A Blip

By KENNETH R. GOSSELIN, Courant Staff Writer, The Hartford Courant

U.S. home construction plunged in November by the most in almost 11 years, a bigger-than-expected decline that economists said may be a one-month blip rather than the start of a trend.

Builders started work on 13 percent fewer homes in November, compared with October, pushing the annual rate down to a seasonally adjusted 1.77 million, the federal government reported Thursday.

Economists had been expecting closer to 1.98 million, according to a survey by Bloomberg News.

Although the slowdown took many economists by surprise, they said the decline is not a sign of collapse in the housing market, which has remained a strong contributor to the economic recovery.

"This is one month of data, and before any conclusions about the housing market can be made, we really have to see that these data are not just one-month wonders," said Joel Naroff, president of Naroff Economic Advisers in Holland, Pa.

Naroff said the level of housing starts in November once would have been considered strong. But that was before mortgage rates fell to historic lows in 2003 and lit a fire under the housing market. Most economists had been expecting a cooling off, but not one this dramatic in a single month's time.

November's decrease was the largest since January 1994. It also cut across single-family and multifamily dwellings.

"We expect the housing market to show some cooling going forward, but we've all been saying that for years," said Peter Kretzmer, a senior economist at Banc of America Securities in New York.

Economists say it can take up to five months for a new trend in housing starts to be established.

Naroff also noted that building permits in November fell just 1.5 percent, indicating that "builders are either not yet seeing any major falloff in demand or think sales will remain solid."

In Connecticut, the number of housing permits issued slowed dramatically in October, the latest month for which data are available. The number of permits fell 23.1 percent, compared with the same month a year earlier.

Despite the weakness in October, Connecticut registered a 15.1 percent increase for the first 10 months of the year, evidence of robust building of single-family homes, apartments and condominiums.

A report on November permits is due in two weeks.

Nationally, November's housing starts were the lowest since May of last year, and home construction declined in all four U.S. regions. Construction fell 13.2 percent in the West, to 468,000 at an annual pace; 19.4 percent in the Midwest, to 312,000; 14.2 percent in the Northeast, to 151,000; and 10.4 percent in the South, to 840,000.

The housing market has been buoyed this year by the failure of long-term mortgage rates to rise in response to higher short-term lending rates.

Mortgage costs may be slow to rise after the Federal Reserve's rate announcement two days ago indicated that inflation was under control. That boosted purchases of government bonds and pushed their yields to their lowest in more than a month.

Long-term mortgage rates are influenced by swings in the yields on 10-year Treasury notes. Some say the yields are too low, considering the outlook for inflation.

But on Thursday, the bond market got a jolt after the government reported that initial jobless claims last week registered their biggest one-week decline in three years and reached their lowest level since early July.

Investors interpreted the report as a positive economic sign, and that dampened demand for the 10-year note. The yield rose 0.11 of a percentage point, to 4.18 percent.

Yields, however, are still well below the 4.42 percent reached on Dec. 2, the day before the federal government reported that job growth in November that was weaker than expected.

This week, the average for a 30-year, fixed-rate mortgage slipped for the second week in a row. The popular borrowing rate averaged 5.68 percent, with an average of 0.6 points, down from 5.71 percent a week ago, according to Freddie Mac's Primary Mortgage Market Survey.

This week's 30-year rate was the lowest since early November.

One-year, adjustable-rate mortgages rose to 4.18 percent this week, with an average of 0.7 points, up from 4.15 percent last week.

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