May Housing Starts Drop 12.2%; High Prices, Interest Rates Cited

Apartment and house building plunged 12.2% in May as single-family home construction slumped to the lowest level in more than three years, the government said Friday.

Economists, who were surprised by the steepness of the drop, blamed rising interest rates and high home prices, particularly in the Northeast section of the country where construction starts fell 22.3%.

Housing activity is closely watched because it often is a harbinger of the direction of the economy as a whole. However, analysts cautioned against overreacting to one month’s report and said they expected at least a modest rebound this summer.

The Commerce Department said the May decline dragged overall housing construction down to a seasonally adjusted annual rate of 1.38 million units, compared to a rate of 1.58 million units in April.

Single-family construction dropped 9.2% to a seasonally adjusted annual rate of 988,000 after dipping 7.2% in April.

Multifamily building starts, a volatile category, dropped 18.9% to a rate of 396,000 units in May, bouncing off a 36.7% increase a month earlier.

Lowest Since 1984

Apartment building has been in the doldrums for more than a year because of high vacancy rates and changes in the tax law that made investment in rental housing less profitable.

It was the most precipitous drop in total housing construction since December’s 15.8% fall and the lowest level in activity since January.

Construction of single-family units have not been lower since August, 1984, when units were begun at a 967,000 annual rate.

“Mortgage interest rates were rising pretty quickly during the month of May, and that rise may have scared a lot of builders into pulling back,” said Richard W. Peach, deputy chief economist of the Mortgage Bankers of America.

According to the Federal Home Loan Mortgage Corp., rates on 30-year, fixed-rate mortgages climbed from an average of 10.05% early in April to 10.58% late in May. The averages do not include add-on fees known as points.

Rates have eased so far this month, averaging 10.35% this week. However, most economists are predicting rising rates through the end of the year.

Increased Payments

“If you’re seriously considering buying a home in the near term, sooner is going to be better rather than later,” said John Savacool, an economist with the Wefa Group, a Bala Cynwyd, Pa., forecasting firm. “There’s a window of opportunity here where rates are down a little bit. It’s probably going to be more favorable than you can expect over the next 12 months.”

An increase of a half percentage point, from 10% to 10.5%, boosts a home buyer’s monthly principal and interest payment on a 30-year, $100,000 mortgage from $878 to $915.

Some analysts pointed to May figures on housing permits, considered a good indication of future construction activity, as a sign of hope. Single-family permits edged up 0.8% in May, although overall permits declined 1.5%.

However, David Seiders, chief economist of the National Assn. of Home Builders, said a survey of home builders early this month showed their confidence slipped significantly from early May. The proportion of builders saying sales prospects were good to excellent fell from 41% to 34%, he said.

The May drop in housing starts was led by identical 22.3% declines in the Northeast, where construction of housing was begun at a seasonally adjusted annual rate of 206,000, and the Midwest, where homes were started at a 269,000 yearly rate.

However, Midwestern starts were seesawing off a 32.1% increase a month earlier, while the decline in the Northeast came on top of an 8.6% drop in April and a 5.9% fall in March.

It was the lowest level of construction activity in the Northeast since September, 1984, when the rate was 203,000 units, and the steepest drop since the 24% plunge of November, 1985.

Starts in the South dropped 6.4% to 555,000 and starts in the West fell 4.8% to 354,000.

Michael Sumichrast, a real estate economist in Washington, said soaring prices of new homes in the Northeast and in California are responsible for declines in those areas. Other factors are the scarcity of suitable land and tight regional labor markets.

“The enormous increase in prices has made it virtually impossible for first-time home buyers to buy homes,” he said. “I have been telling builders they are pricing themselves out of the market.”

He said builders have been concentrating too heavily on the move-up home buyer and should build more modest homes on smaller pieces of land in order to attract less wealthy buyers.