Construction of Homes Drops to Five-Year Low : December Decline to Annual Rate of 1.37 Million Units Is Said to Reflect Impact of Market Crash

Ending the year with a clunk, home construction in 1987 fell to its lowest level since the recession year of 1982, the Commerce Department reported Wednesday, a drop that some analysts said reflected the impact of the October stock market crash.

Construction activity plunged an unexpected 16.2% in December to a seasonally adjusted annual rate of 1.37 million units, its lowest level in five years. Construction began on 1.62 million homes in 1987, more than 10% fewer than in 1986, the Commerce Department said.

The troublesome news on the housing front was followed by a wave of selling that sent the stock market to new lows Wednesday in the still-young year. The Dow Jones industrial average fell 57.20 points to 1,879.14, its lowest closing level in more than a month.

Year-end home construction figures for California are not expected to look much better than the national numbers. Although final state statistics for 1987 are not yet available, last year’s building activity should be more than 20% less than 1986 levels, according to estimates from the California Construction Industry Research Board.

Orange County Figures

In Orange County, local governments issued permits for an estimated 9,300 single-family homes last year, down 5% from the 9,800 permits issued in 1986, according to the Construction Industry Research Board.

But the total number of housing units for which permits were issued rose 2% last year. The increase occurred because, unlike the trend in the national housing market, where construction of multifamily units dropped sharply, permits for apartments and condominiums increased strongly in the county in 1987.

Even without the tax breaks that ended with federal tax reform in 1986, apartment construction in Orange County remained strong last year because the vacancy rate is so low.

Apartment and condo permits in the county rose by 1,100 units in 1987, or 7%, from 15,100 in 1986 to 16,200.

But a slow-growth initiative is looming that might sharply curtail home construction in the unincorporated areas of southern Orange County, where most new homes are being built.

Some experts believe that housing construction in the county will rise again this year as builders race to beat the initiative, which could come to a vote this year.

Others, such as the Chapman College Center for Economic Research, forecast a drop in housing construction in line with national forecasts.

Some construction industry analysts viewed the national statistics for December as the first hard numerical evidence that the October stock market crash has hurt home construction. Housing starts jumped an unexpected 6.6% in November.

New home construction is a key measure of national economic health because of its ripple effects in the appliance, carpet and furniture industries. The stakes are high now because the state of the economy will play a major role in determining whether the Republicans retain the White House in the November election.

Though White House spokesman Marlin Fitzwater acknowledged Wednesday that “we are disappointed to see housing starts fall,” he noted: “This is only one month’s figures and I wouldn’t try to prognosticate on the basis of it.”

Overall, Fitzwater said, the economy is “in great shape, strong on every front.”

Some analysts caution against reading too much into winter-month building figures, saying home construction levels during these periods are often skewed by factors such as bad weather and holiday shutdowns.

Analysts said they expect the drop to continue into January and the following months but not as steeply as in December. They said home construction nationwide should average 1.5 million units in 1988 and 1989--about 7% lower than 1987 levels.

“I don’t believe the December number is a harbinger of disaster,” said John Tuccillo, economist for the National Assn. of Realtors. “What you are seeing is a falloff in the home-building industry due to economic uncertainty caused by what happened in the market.”

Higher mortgage rates and a continuing drop in apartment construction will also contribute to the gloomier building outlook in 1988, Tuccillo said.

Tax Code Changes Cited

Most of the construction slowdown has been in apartments and condominiums, which are lumped together in the so-called multi-family building index. Apartment construction in 1987 was slowed by overbuilding and changes in the federal tax code that made income-producing real estate less attractive to private investors.

Single-family building has dropped as well but not as much, analysts said.

“Single-family construction is still very strong,” noted Sanford Goodkin, a real estate consultant in San Diego. “The multifamily area has been overbuilt, and construction in that area should go down.”

The California Construction Industry Research Board, which uses building permits--rather than housing starts--as a barometer of home construction levels, said residential construction activity in the state is expected to fall to 247,000 permits in 1987 from 314,000 in 1986. Building activity should drop further to 208,000 units in 1988, according to Ben Bartolotto, the group’s research director.

On a scale of 1 to 10, “I’d say 1987 was a seven and 1988 will be closer to a five,” Bartolotto said. “Anything lower than five means a recession.”

Home construction activity in recent years peaked in 1986, the research group said. About 272,000 permits were issued in California in 1985, 224,000 in 1984 and 172,000 in 1983, industry figures show.

Times staff writer Michael Flagg in Orange County contributed to this story.