Housing Starts Jump 7.2% to 6-Month High

The home-building industry, one of the weakest sectors in an otherwise robust U.S. economy, showed surprising strength in October as housing starts rose 7.2% to their highest level in six months, the Commerce Department said Thursday.

New construction of houses rose to a seasonally adjusted annual rate of 1.55 million units last month, after falling 0.8% in September.

It was the largest one-month jump since February and lifted housing starts to their highest level since April, when they were running at a 1.58 million-unit pace.

With last month’s unexpected increase, housing starts were 1.0% above their October, 1987, rate.

More than half the rise was centered in the West, where starts surged 15% last month, largely reflecting a frenzied housing market in California, economists said.

They also said a temporary decline in mortgage interest rates of more than half a percentage point between mid-August and early November bolstered activity.

Mortgage Rates a Factor

Some economists said the California home-building binge is being fueled by growing concern that the state or some congested localities may place restrictions on future development.

“What we’re seeing is primarily a Western phenomenon,” said Mark Obrinsky, an economist with the U.S. League of Savings Institutions. “I think, in retrospect, we’ll see this as a little bit of a spike. We may see this pace for another month or so, but we surely won’t see it for another six months.”

Starts also rose 7.6% in the Midwest and 4.6% in the South, but fell 2.4% in the Northeast, where economists said the supply of housing have been plentiful.

Other factors contributing to last month’s overall jump in starts were a downward drift in mortgage rates since August and a strong U.S. economy, including a civilian unemployment rate that is at a 14-year low of 5.3%, economists said.

“These are the ingredients that make for a stronger housing market,” said Lyle Gramley, chief economist of the Mortgage Bankers Assn.

But with mortgage rates already resuming their upward trend since the beginning of this month and likely to continue rising, economists said home-building activity will probably resume its downward trend through the middle of next year.

“My expectation is that interest rates are going to go up further and that housing starts will be tailing off,” said Gramley.

“We do not view this as any kind of a permanent resurgence,” added economist David Seiders of the National Assn. of Home Builders.

“We are definitely looking for weaker numbers for the rest of the year and the first half of next year,” Seiders said.

Volatile Statistic

Seiders called the latest housing start increase a mixed blessing for the industry because it is another sign of a strong, possibly too strong, economy that may prompt the Fed to raise interest rates to keep a lid on inflation.

“Housing starts have been subject to a relatively large fluctuation in recent months,” White House spokesman Marlin Fitzwater said, adding that the rebound last month “puts the level of housing starts at 6.3% above the third-quarter average. Starts in October still remain approximately 5% below last year’s average. So, on the whole, it’s good news.”

The housing start statistic is historically very volatile and early estimates are often sharply revised as the government collects more data.

Starts of single-family homes jumped 10% in October to a 1.15-million-unit annual rate after a 3.3% September drop, the department said.