Housing Construction Rises 2.4% : Rising Mortgage Rates Could Cut Short July Rebound

Housing construction rose a moderate 2.4% in July, the government reported Wednesday, but economists warned that rising mortgage rates could make the two-month housing rebound brief.

The Commerce Department said new homes and apartments were being built at a seasonally adjusted annual rate of 1.49 million units last month after advancing 4.4% in June.

Housing starts had dropped a sharp 12.1% in May to the slowest pace in three years. Rising mortgage rates were blamed.

The June-July rebound was attributed to stabilized mortgage rates, but last week the Federal Reserve boosted the discount rate, the interest it charges for loans to member banks.

This move was widely interpreted as the opening salvo in a renewed battle by the central bank to drive up interest rates to fight inflation. As a consequence, a variety of other interest rates, including the banks’ prime lending rate and mortgage rates have moved higher.

Concern About Policy

Fixed-rate mortgages rose to 10.57% by the end of last week, and analysts predicted that mortgages would soon top 11%.

“I believe we have seen the peak for housing starts this year as rising interest rates cut into sales,” said Richard Peach, an economist with the Mortgage Bankers Assn.

David Seiders, chief economist of the National Assn. of Home Builders, said his organization was so concerned by the Fed’s credit tightening moves that he asked Federal Reserve Chairman Board Alan Greenspan in a letter for “a more evenhanded approach.”

“Clearly, the Fed views the housing industry and other interest rate-sensitive sectors of the economy as being sacrificial lambs,” Seiders said.

Sales of homes and other high-priced items usually are the first to fall off when the Federal Reserve tries to dampen borrowing by raising interest rates.

Michael Sumichrast, an economist and publisher of a construction industry newsletter, said that if mortgage rates climb to 11.5% or higher, it would spell disaster for the housing industry.

Mortgage Rate Fears

He said home sales already have been hurt by big price increases in many parts of the country.

“I don’t think you can sell houses at 11.5% to 12% mortgage rates in this market because of the price increases,” Sumichrast said.

Analysts say another worrisome sign is that housing permits, considered a good barometer of future activity, fell in July by 5.4% to an annual rate of 1.41 million units. It was the biggest permit decline since January.

James Christian, chief economist of the U.S. League of Savings Institutions, said the drop in housing permits probably reflects builders’ fears of rising mortgage rates.

He said the impact of higher rates should be moderated by a consumer shift toward adjustable-rate mortgages, which carry a lower initial rate.