U.S. Reports 3.9% Drop in Housing Starts

Housing construction slowed in March, partly because of a double-digit drop in new apartments, but remained relatively strong for a fifth straight month despite rising mortgage rates, government data released Wednesday indicated.

“Builders are continuing to build,” said economist David Lereah of the Mortgage Builders Assn., “but I get nervous going forward. Eventually, interest rates will win this war” if they continue to rise and price buyers out of the market.

So far, however, rates have not had much of a depressing effect. Although now at a 10-month high, they are still at what have been affordable levels. That has resulted in healthy sales of both new and existing homes recently.

David Berson, an economist with the Federal National Mortgage Assn., also contends that an expanding economy, including modest job and income growth, is offsetting some of the effect of higher financing costs.

Some analysts also say fears of even higher rates are driving fence-sitters into the market.

Housing starts fell 3.9% in March, to a seasonally adjusted 1.45-million annual rate, the Commerce Department reported. It was the steepest decline since starts fell 6.2% a year earlier.

But activity was mixed regionally, rising in the Northeast and Midwest but falling in the West and South.

Starts dropped 16.1% in the West, to a 349,000 rate, the biggest drop since falling 20.7% in March 1995. Some analysts said the decline brought starts back to “a more normal level” after two months of unsustainable gains.

Despite the overall decline, starts remained above 1.4 million for a fifth straight month. And the February rate was even stronger than initially estimated--1.51 million rather than 1.49 million.

Economist Joe Blalock of America’s Community Bankers noted that the starts rate for the first quarter, “typically not one of the stronger quarters,” averaged 1.47 million, compared with 1.46 million single-family homes and apartments built in 1994. Starts dipped to 1.35 million last year.

But many analysts believe that the housing market is reaching a plateau--because of both mortgage rates and demographics.

Thirty-year fixed-rate mortgages averaged 7.68% in March, up from 7.17% in February and 7.03% in January. They have continued to climb and averaged 8.05% last week, highest since 8.27% in May 1995.

The monthly payment on a $100,000 mortgage with a 7% interest rate is $665, whereas the payment on the same loan with an 8% rate is $734--an increase of $69.

“I don’t think rates will keep going up,” Fannie Mae’s Berson said. “But on the other hand, I don’t think the strong housing market will continue. It will get modestly weaker. . . . There’s not much pent-up demand left” as the economy enters its sixth year of expansion.

Analysts said the number of applications for building permits also suggest new construction may be leveling off. They inched up a barely perceptible 0.1%, to a 1.41-million rate.

Single-family starts, which are interest-rate-sensitive and represent about 80% of residential building activity, slipped 1.4% to a 1.16-million rate from one of 1.18 million in February.

But construction of apartments and condominiums, an often volatile category not as subject to interest-rate changes, plunged 12.7% to a 288,000 rate. Multifamily starts totaled a 330,000 rate in February.

Regionally, starts shot up 10.2% in the Northeast to a 140,000 rate, highest since 169,000 in November 1994.

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Housing Starts

Seasonally adjusted annual rate, in millions of units:

March 1996: 1.45

Source: Commerce Department