New-Home Building Sags as Mortgage Rates Climb

One of the driving forces in the economy slowed abruptly in November as rising mortgages drove construction of new homes to the weakest pace in seven months, the Commerce Department said Friday.

Housing starts fell 2.3% last month to a seasonally adjusted annual rate of 1.6 million units, the slowest pace since April, after a flat October. All of the weakness was in single-family home construction; starts of apartment buildings and other multi-unit housing rose in November.

Nationally, new-home starts last increased in July and they have been flat or lower in every month since then.

“We aren’t going from boom to bust, but we are going from boom to sag,” said Robert Dederick, an economic consultant at Northern Trust Co. in Chicago.

California’s home building, as measured by construction permits, also has seen a slowing since late summer. November figures for California aren’t yet available, but Friday’s Commerce report for the regions and the dry weather last month in California suggest that residential building in the state was comparatively more active.

Still, California’s home building for all of this year is expected to come in well below forecasts of 150,000 units. Builders in the state have been constrained by high costs and low availability of land as well as difficulties getting permits.

Moreover, builders in California, as elsewhere, say construction has been affected recently by rising interest rates.

Rates on 30-year mortgage loans averaged 7.74% in November and crept up further by mid-December to 7.86%. Though not wildly higher than last January’s average 6.99% level, current rates add nearly $100 to the monthly payment on a typical $100,000 mortgage.

The housing report is the last piece of economic data that Federal Reserve policymakers receive before Tuesday’s final policy-setting session of 1999.

Robust consumer demand fed by ample jobs and rising incomes has kept the economy expanding at a brisk rate heading into 2000, so any signs of moderation likely would be welcomed. The Fed is expected to keep rates steady next week, but analysts see a rising chance of more interest-rate hikes early next year to keep inflation in check.

U.S. Treasury bonds gained after Friday’s report, which suggested a slowdown in an industry that has been a dominant force in the near-record U.S. economic expansion. The 30-year bond rose almost 13 cents, pushing down its yield about 1 basis point to 6.38%. Stocks advanced, with the Dow Jones Industrial Average closing up 13 points, or 0.1%, at 11,257. The Nasdaq Composite Index rose 38 points, or 1%, to 3,753.

The falloff in November housing starts was concentrated in one-family dwellings, which fell 3.6% to 1.29 million a year, while starts on apartments rose 22.7% to 308,000. That has been the pattern in California in recent months as well.

“This divergence between starts of single-family and multifamily structures is important, as the multiplier effect on spending on secondary items such as furniture and appliances is greater for single-family units,” said economist Marilyn Schaja of Donaldson, Lufkin and Jenrette Securities Corp. in New York.

Regionally, building starts in November fell 9.9% in the South to a rate of 680,000 a year, the slowest pace in a year. In the Midwest, November starts fell 6.8% to 356,000 a year last month. But in the West, starts on new homes jumped 14.9% to an annual rate of 417,000 in November, and in the Northeast, they were up 7.3% to 147,000 a year.

For all of 1999, U.S. building starts are still expected to advance by 2.5% to about 1.7 million units--a 13-year high. Next year, however, will be a different story. Most analysts see the pace of home building falling significantly.

In California, home building is widely expected to rise next year to about 150,000 units, but that would be an increase from a very low base. Unlike the nation as a whole, which has had stronger-than-expected home building for the last several years, California’s residential construction activity has fallen below expectations in recent years.

Nationally, analysts have for some time been predicting a dropoff in home building because of demographic shifts. In recent years, the nation’s population has been growing at a rate of 1% or less annually, and the population of those in prime home buying ages, 25-44, has actually been declining.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Housing Starts

Seasonally adjusted annual rate, millions of units: November: 1.6 million

*

Source: Commerce Department