Housing Starts in May Drop Sharp 12.2%

Housing construction plummeted 12.2% in May, the steepest drop in five months and one that carried across single-family housing and apartment construction and hit every area of the country, the government said today.

The huge May decline surprised analysts, who had been expecting only a modest decline linked to rising mortgage interest rates.

Rates on 30-year, fixed-rate mortgages climbed from 10.05% at the start of April to 10.58% at the end of May, according to the Federal Home Loan Mortgage Corp. They eased slightly in the first weeks of June.

Variable Rates Help

However, some analysts had said the growing popularity of adjustable rate mortgages would curb the effect of rising long-term rates. An increase of a half percentage point, from 10% to 10.5%, would boost a home buyer’s monthly payment on a 30-year, $100,000 mortgage by about $37.

The Commerce Department said the drop in construction dragged activity down to a seasonally adjusted annual rate of 1.38 million units in May, the lowest level since January, when 2,000 fewer units were begun.

It was the steepest drop since December, when starts plunged 15.8%. They had fallen again in January, by 1.2%, before posting increases of 9.9%, 0.7% and 3.1% in February, March and April respectively.

Caution on Overreaction

Economists watch housing activity closely because it is often a harbinger of the direction of the economy as a whole. However, they cautioned against overreacting to one month’s report.

“If we got two, three, four months of back-to-back declines, then it would give plenty of reason for concern . . . because a pretty big size slice of the economy is tied to housing,” said John Savacool, an economist with the Wefa Group, a Bala-Cynwyd, Pa., forecasting service. “I expect to see some sort of recovery in June and July.”