The Economy: Construction

D espite the lowest mortgage rates in two decades, construction starts on new homes stalled in June because buyers remain worried about the economy, a Commerce Department report says. Floods in the Midwest also took a toll on the annual rate of housing starts, which was stuck at 1.25 million units in June, the same as in May. However, starts were 10% above the June, 1992, rate of 1.14 million. And starts rose in the West.

What the numbers mean: The numbers are disappointing because of economists’ earlier expectations that housing would be one of the major forces driving the economic recovery. Mortgage rates are the lowest in more than 20 years, and that would be a potent incentive to buy new homes if consumer confidence were not being battered by fears about jobs and taxes.

What’s ahead: Applications for building permits weakened in June by 1.3% to a seasonally adjusted annual rate of 1.11 million units, not a good sign for future building activity. Applications had risen 1.8% in May. In addition, housing industry analysts said they worry about reports that the Federal Reserve Board favors a preemptive strike against inflation by raising interest rates. Low rates are considered vital to keep housing expanding.

How regions fared: Housing starts climbed 16.2% in the Northeast to an annual rate of 136,000 units. In the West, they were up 4.4% to a rate of 307,000 units, but in the Midwest, starts dropped 2.1% to an annual rate of 277,000 units, and permit applications for future building also declined 1.5%. In the South, construction starts in June fell 4.6% to a rate of 534,000 units.

Housing Starts

Seasonally adjusted annual rate in millions of units:

June, ‘93: 1.25

May, ‘93: 1.25

June, ‘92: 1.14

Source: Commerce Department