Housing Construction Falls 7.4%; Biggest Drop in a Year

Housing construction, one of the few bright spots in the economy, suffered a 7.4% drop in May for the biggest setback in a year, the Commerce Department reported Tuesday.

The department said new homes and apartments were constructed at an annual rate of 1.89 million units in May, down from an April level of 2.04 million units. Strength in single-family construction was undermined by a sharp fall in apartment building.

Best Year Since 1973

The decline ended four consecutive months in which housing activity had been at a rate of 1.9 million units or more, the strongest pace since the 1977-78 housing boom. But analysts for the most part discounted the drop, saying the lowest mortgage rates of this decade should still give the housing industry its best year since 1973.

“The decline is a little disappointing, but we shouldn’t lose sight of the fact that an annual rate of 1.89 million units is still very strong,” said David Wyss, an economist with Data Resources.

Wyss noted that mortgage rates, while they have been rising in the past month, are still well below levels of a year ago.

A weekly survey by the Federal Home Loan Mortgage Corp. said fixed-rate mortgages dipped to a seven-year low of 9.86% in late April but have since risen to a national average of 10.76% last week.

Analysts said rates will probably stabilize at around 10.5%, and they predicted strong sales and construction of single-family homes in the months ahead.

In May, single-family homes were constructed at an annual rate of 1.26 million units, identical to the April level, but construction of apartment complexes with five or more units plunged 21.9% to an annual rate of 542,000 units.

It was the steepest drop in apartment building since a 35.6% fall in February, 1985. Some analysts said the decline reflected investment jitters about the proposed elimination of several real estate tax breaks in legislation now before Congress.

Decline Not a Surprise

Analysts also warned that a high rate of rental vacancies paired with the anticipated loss of tax incentives for low-income housing would depress the multifamily sector as the year progressed.

“The big drop in multifamily units is something we’ve been expecting for some time,” said Mark Obrinsky, an economist with the U.S. League of Savings Assns. “In many parts of the country, vacancy rates are too high to sustain further building. It may be builders are having a little bit of cold feet in anticipation of tax reform.”

Commerce Secretary Malcolm Baldrige expressed optimism that housing starts would “maintain a healthy pace because of the general level of interest rates and the growth in consumer income.”

The 7.4% May decline followed a 4% increase in April and was the largest drop since a 9% plunge in May, 1985.

Building permits, considered a good sign of future activity, also fell sharply in May, declining by 5.3% to an annual rate of 1.79 million units. This followed a 2.8% increase in April and was the biggest monthly decline since a 7.7% drop last October.

By region, the weakness was concentrated in the Midwest and Northeast. Housing construction slumped 33.2% in the Midwest to a seasonally adjusted annual rate of 247,000 units. Housing construction rose 5% in the South to an annual rate of 839,000 units and advanced 2.8% in the West to a rate of 550,000 units. In the Northeast, which has been the hottest region this year, starts fell 24.8% to an annual rate of 252,000 units.