Drop in Interest Rates Cited : New Home Construction Jumps 7.5% in November

From Staff and Wire Reports

U.S. housing starts jumped a surprising 7.5% in November, the government reported Wednesday, indicating that lower interest rates more than offset fears sparked by October’s stock market crash.

The Commerce Department said work began on new homes at a seasonally adjusted annual rate of 1.64 million units, the same rate as in November, 1986, but higher than the October rate of 1.52 million.

No figures were available on how the construction industry fared in California last month. George Francis, senior vice president of Metmor Financial, a Los Angeles mortgage banking firm, said California accounts for about 20% of the nation’s housing starts, and so what happens in the state has a strong effect on the national results.

“Worries that the housing market might take a big hit have largely been allayed,” said Lyle Gramley, chief economist for the Mortgage Bankers Assn., noting that building on new single-family homes, the most likely category to be affected by the crash, was up by 1.5%.


Fred Cannon, an economist with Bank of America in San Francisco, said the ill effects of the stock market crash Oct. 19 on consumer confidence have been offset by lower interest rates. “Lower interest rates have spurred a push into the housing sector nationally. I suspect that is mirrored in California.”

However, Cannon said he did not think that housing starts would continue to show dramatic gains in 1988. “From here on, housing starts will progress at a pretty even pace,” he said.

Carol Bray, a senior vice president at First Interstate Bank in Los Angeles, agreed that the figures do not indicate a building boom. She said the number of permits taken out by home builders slowed in October, the last month for which statewide information is available. Bray said building permits would be down 18% this year from 1986. In 1988, permits would decline by another 8%, she predicted.

Bray said she expects interest rates to rise and the demand for housing to slow, causing the decline in building permits, which would indicate a slowdown in housing construction.


Building permits are used as a yardstick to see how the construction economy is doing, but normally there is a two-month lag between the issuance of a building permit and the start of construction, said Bob Norek of the California Building Industries Assn. in Sacramento.

The National Assn. of Realtors said it now expects the fourth quarter of 1987 to show an overall gain in housing starts but predicted that they will decline through the first half of next year.

Although November’s 7.5% increase was the biggest one-month rise in housing starts since a 10.8% gain in December, 1986, the government said builders took out the smallest number of building permits in almost five years during the month. The number of permits fell 0.7% to 1.453 million, the lowest rate since January, 1983.

Analysts, however, pointed out that the permits have been flat for a number of months and said November’s decline was not big enough to herald a significant dip in future housing starts.


“It’s not a bust or anything like it,” said Mark Obrinsky, a U.S. League of Savings Institutions economist. “The aftermath of the Wall Street turmoil . . . was probably good for housing. Interest rates came down as a result. Right now, mortgage rates are running a full percentage point below their peak just before October.”

Fixed-rate, 30-year mortgages reached a high of 11.58%, on average, on Oct. 16 but had dropped to 10.55% at the end of November.

“The interest rate declines we’ve had since Black Monday have counteracted any effect on buyer demand,” agreed Dave Seiders, chief economist with the National Assn. of Home Builders. But he expects fewer starts in December.

Much of November’s gain was due to a 29.7% increase in starts of apartment buildings with five units or more, an often erratic category that had fallen 16.7% in October.


Starts of single-family homes nationwide totaled 1.119 million, up from October’s 1.102 million, while building permits dropped by just 0.6%. Starts for buildings with two to four units fell 11.8% from October to November, but building permits increased 6.3%.

Building activity differed by region, with the biggest increase in the Midwest, where starts rose 21.6%. The rate was up 1.9% in the Northeast, up 5% in the South and up 5.8% in the West.