September 26, 2005

U.S. housing hotbed starts to cool down

Greater than expected decrease, but overall stats still look bright

WASHINGTON

Construction of new homes in the United States edged down in August for a second consecutive month, providing evidence that the nation’s red-hot housing market may finally be cooling a bit.

The Commerce Department reported that construction of new homes and apartments dropped 1.3 per cent last month after a decline of 1.5 per cent in July.

The decrease was larger than had been expected and it marked the first back-to-back declines in housing starts in 17 months.

Analysts have for some time been forecasting that the supercharged housing market would slow, but they are not forecasting a repeat of the dramatic plunge in stock prices that occurred in 2000 with the bursting of a speculative bubble.

Instead, analysts believe that housing activity will post a more moderate slowdown with sales tapering off. Gains in home prices slowing and perhaps falling in some of the hottest sales areas.

Even with the back-to-back declines, housing construction remained at a seasonally adjusted annual rate of 2.01 million units in August, the eighth month out of the past nine that starts have been above the two-million mark.

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 U.S. 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.

Hurricane Katrina is ex-pected to have a short-term negative effect on housing by disrupting construction and sales in the devastated Gulf Coast areas.

However, economists believe massive rebuilding will bolster housing construction this year and in 2006.

For August, construction of new single-family homes fell by 0.5 per cent to 1.71 million units while construction of multi-family units was down a sharp six per cent to 328,000 units.

By area of the country, construction rose by 13.3 per cent 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.

Construction fell by 6.6 per cent in the south to an annual rate of 915,000 units while building activity was down 5.2 per cent in the midwest to an annual rate of 346,000 units and down 4.1 per cent in the northeast, to a rate of 187,000 units.

Gains in home prices slow and may fall in some of the hottest areas of the U.S.

Associated Press

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