Construction of new homes reached 1.74 million units in 1984, giving builders their best year since 1979, the government reported Thursday.
Falling interest rates are expected to spur construction activity through at least the first half of this year. After that, many analysts expect interest rates to resume rising to levels that will dampen demand.
In its report, the Commerce Department said the 1984 construction performance, a 2.4% boost from 1983, was the best since 1.75 million homes were built in 1979.
It was far smaller than the 60% jump posted in 1983 over 1982, but 1983 was a year in which the housing industry was recovering from the worst slump since World War II. Construction starts had plunged to 1.06 million units in 1982, the worst level in 36 years.
"Housing has been out in front of this economic expansion for the past two years, building more than 3.4 million new units and creating 5 million man-years of employment and $98 billion in wages," said Pete Herder, president of the National Assn. of Home Builders.
Building activity was strong in the first half of 1984, but it went into a pronounced slump during the summer as rising interest rates discouraged home buyers.
Conventional fixed-rate mortgages peaked at 15.23% in July. By early December, they had fallen to 13.82%, according to a survey by the Federal Home Loan Bank Board.
Private analysts said rates have dropped even further since then, with fixed-rate mortgages currently available in many parts of the country at between 12.5% and 13.5%.
The lower interest rates are encouraging builders to increase their construction levels. The 2.1% December gain in housing starts followed a 1.2% rise in November. Analysts were also heartened by a sharp gain in the issuance of building permits since October.
Building permits rose 12.2% in November. While there was a slight decline of 0.2% in December, analysts said that the seasonally adjusted annual rate of 1.59 million permits will translate into further construction gains in coming months.
The gains have come despite the fact that sales of single-family homes actually fell 11.6% in November. Analysts said many home-buyers are apparently waiting for interest rates to fall further and will be lured into the market in heavy numbers this spring when rates start edging up again.
"We are looking for long-term mortgage rates to begin to rise by March," said Thomas Harter, chief economist for the Mortgage Bankers Assn. "As they start rising, I think you will see a lot of sales as people realize rates aren't going to go lower."
Robert Hopkins, senior real estate economist with Chase Econometrics, predicted that 1985 will be a "moderately good year for housing. It won't be a year of catch-up from a recession, but it won't be a year when we see housing starts severely hurt."
Hopkins forecast that starts would dip to 1.55 million units this year, 11% below the 1984 level.
Michael Sumichrast, chief economist for the National Assn. of Home Builders, forecast a milder decline of about 7% this year, and he said that this will come only after a very active spring, based on a monthly survey of builders.
"In January, there was an exceedingly sharp improvement in builders' expectations for the next six months," Sumichrast said.
Jack Carlson, chief economist for the National Assn. of Realtors, was the most optimistic, forecasting that housing starts will actually rise this year, hitting 1.85 million units. He based this prediction on the belief that mortgage rates will fall throughout most of the year, dropping to 12.7% by next December.
Commerce Secretary Malcolm Baldrige also predicted a good year, saying: "Continuing growth in the economy, low inflation and the lowest mortgage rates since late 1983 are a good foundation for housing starts in 1985."