Tuesday, June 19, 2007

U.S. Economy: Housing Starts Drop; Slump May Persist (Update5)

By Bob Willis

June 19 (Bloomberg) -- Home starts in the U.S. fell for the first time in four months in May as interest rates rose, suggesting the worst housing recession in 16 years will persist.

Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from the prior month, the Commerce Department said today in Washington. Building permits increased 3 percent to 1.501 million.

The slump, which has lasted almost two years, is restraining economic growth even as inflation is too high for the comfort of Federal Reserve officials. Meanwhile, the average rate on a 30-year fixed mortgage has jumped to the highest in more than a year, putting pressure on first-time buyers and raising the prospect of additional defaults.

``There is still some more downside to the housing market,'' said Nariman Behravesh, chief economist at Global Insight Inc. in New York. ``Mortgage rates started up again and there is still a shakeout going on in subprime.''

Behravesh came closest to predicting the drop in starts among 68 economists surveyed by Bloomberg News. The median forecast was for a decline to a 1.472 million pace.

The housing industry is also wrestling with soaring foreclosures among subprime borrowers -- those with poor or incomplete credit histories. Lower prices and more incentives have failed to spur interest as buyers wait for bigger bargains.

Yields on Treasury notes fell and stocks were little changed. The yield on the benchmark 10-year note was 5.08 percent at 2 p.m. in New York. A six-week rout pushed the yield to a five-year high of 5.32 percent on June 13.

Weakness in West

The drop in starts was led by a 20 percent slump in the West. Construction also fell 1.6 percent in the South. Starts rose 16 percent in both the Northeast and Midwest.

Housing's recession cut 0.9 percentage point from growth in the first quarter after detracting 1.2 percentage points in the second half of 2006.

The drop in homebuilding slowed economic growth to a 0.6 percent annual rate in the first quarter, the weakest in four years. Economists surveyed by Bloomberg forecast the economy will grow 2.1 percent this year, compared with an average of 3.1 percent over the last three decades.

Borrowing Costs

The average rate on a 30-year fixed rate mortgage rose to 6.74 percent last week, according to figures from Freddie Mac, the No.2 buyer of U.S. mortgages. The increase reflected expectations of faster global growth and fears inflation would accelerate. The rate averaged 6.22 percent last month and 6.18 percent in April.

Starts were down 24 percent in the 12 months ended in May.

``The trend down is still intact,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York, who forecast a fall to 1.47 million units. ``The housing contraction is going to be a drag for the rest of the year.''

Construction of single-family homes fell 3.4 percent last month to a 1.17 million rate. Work on multifamily homes, such as townhouses and apartment buildings, increased 3.1 percent to an annual rate of 304,000, the most this year.

The increase in permits was led by a jump in multifamily authorizations. Permits for single-family homes dropped 1.8 percent to a 1.05 million annual pace, the lowest since July 1997.

``We continue to see a deterioration in demand for single- family homes, and so it looks like there's more downside to go for the housing market,'' said Tim McGee, chief economist at U.S. Trust Corp. in New York.

Unsold Homes

Record levels of unsold homes suggest the slump is far from over. Fed policy makers now acknowledge the housing recession may linger longer than previously forecast.

``The adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,'' Chairman Ben S. Bernanke said June 5.

A record number of Americans were at risk of losing their homes last quarter because they couldn't make payments as interest rates rose and growth slowed, according to a report last week from the Mortgage Bankers Association. The share of all mortgages entering foreclosure rose to 0.58 percent from 0.54 percent in the fourth quarter.

The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, combined with the increase in foreclosures has raised concern more homes will be thrown back on the market.

Subprime

Some banks have made it more difficult for borrowers to qualify for a mortgage in the wake of the subprime debacle. Add the jump in rates, and affordability has taken a hit.

Declines in sales, construction and prices this year are going to be steeper than previously thought, the National Association of Realtors said June 6, in its fourth forecast revision this year. Housing starts are likely to fall 21 percent to 1.43 million from 1.8 million last year, the group said.

Sales of previously owned homes probably will tumble 4.6 percent to 6.18 million and the median price likely will fall 1.3 percent to $219,100, the Chicago-based trade group said. A month earlier, the association projected 2007 home sales to decline 2.9 percent. Sales of new homes will fall to 860,000 from 1.05 million last year, the group said.

A report yesterday showed builders turned more pessimistic this month. The National Association of Home Builders/Wells Fargo sentiment index dropped to 28, a 16-year low, from 30 in May. Readings below 50 mean most respondents view conditions as poor.

`Really Worried'

``Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,'' David Seiders, chief economist at the National Association of Homebuilders, said in an interview yesterday.

Hovnanian Enterprises Inc., New Jersey's largest homebuilder, last month reported its third consecutive quarterly loss as it cut prices and wrote off land options while sales continued to plummet.

``Without a doubt, things have slowed since about March,'' said Ara Hovnanian, the builder's chief executive officer in an interview yesterday. ``There is not a recovery that is about to happen.''

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net

Last Updated: June 19, 2007 15:19 EDT

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