Builders Predict a 7.4% Drop in Housing Starts

The nation’s home builders on Friday forecast a 7.4% decline in housing starts and a 5% drop in new home sales this year, continuing a three-year decline.

The forecast by the National Assn. of Home Builders came a day after the Commerce Department reported 1988 housing starts of 1.49 million, an 8.2% decrease from 1987’s 1.62 million.

Despite the decline, NAHB economist David Seiders said housing starts will remain above 1 million at an estimated 1.38 million. “Frankly, that’s not a bad year,” he said.

Seiders and other economists appearing Friday at the NAHB’s annual meeting in Atlanta said that they expected the Federal Reserve Board, the nation’s central bank, to maintain a tight rein on credit, causing interest rates to rise early in the year to restrain inflationary pressures.

“The economy is destined to slow down in 1989. It has to,” said Seiders, although he added that “it would take a policy mistake” to bring about a recession.

The popularity of adjustable rate mortgages since the last round of rising interest rates also presents a new problem, the economists said.

Lynn Michaelis, the chief economist for the forest products firm Weyerhaeuser Co., said mortgage holders could find themselves paying as much as $10 billion more in house payments as increasing rates are reflected in their loans.

“Most people have had a positive experience” with ARMs, he said, but now will face higher payments.

Richard Pratt, chairman of Merrill Lynch Mortgage Capital, admitted that the phenomenon may cause delinquency rates to increase, but said the overall effect is unclear.

The economists estimated that ARMs account for about $500 billion of the total $2-trillion mortgage debt.