Building Slows in Nation, Not State
Record slowdowns in housing construction in the nation and most of the West in May show that mortgage interest rate increases are finally affecting this key indicator of the nation’s economic health, experts say. Construction in California, however, continues to hold steady for now.
Builders started work on 4% fewer homes nationwide in May than they did in April, according to a report released Friday by the Commerce Department. The report caused some economists to declare that six successive interest rate hikes by the Federal Reserve Board are causing the overall housing market to slow.
The bigger-than-expected decline left housing starts at their lowest level since last June, when the Fed started this latest cycle of rate increases.
“In the United States as a whole it looks like we’ve reached a turning point,” said Dan Sansbury, chief of the Census Bureau’s residential construction branch. “We’ve had drops in housing starts for three months in a row since they peaked in February.”
A slowdown in the frenetic pace of housing construction in Phoenix and Las Vegas largely put the brakes on housing starts in the West, causing a slowdown of about 13.6% in May over April, economists said. The West, as defined by the Commerce Department, encompasses 13 states from Alaska to New Mexico to Montana.
But so far California home builders aren’t deterred by early signs of a national slowdown in the housing market. Building permits issued in the state for the first four months of this year are up slightly over last year, according to the Construction Industry Research Board. Permits are considered an indicator of likely future building activity.
And in some areas, such as the Los Angeles/Long Beach metropolitan area--where building permit activity jumped 22% for the first four months of the year--and in Santa Barbara--where it jumped 60%--building permit activity is up markedly over last year.
Building permit activity in the Los Angeles area is up this year largely because the region has trailed the rest of the state in its recovery from the recession, said Jack Kyser, chief economist at the Los Angeles County Economic Development Corp.
“There’s some catch-up in Los Angeles County, where we have a housing deficit of over 200,000 units,” Kyser said.
Permit activity for the first four months of the year fell significantly in Orange County and in Ventura over the same period last year.
Developers in the state say mortgage interest rate hikes rank far down their list of concerns, below spiraling housing costs, lack of buildable land and resistance by local governments to issue building permits.
“I haven’t talked to anyone that’s scaling back at this time because of interest rates,” said Robert Rivinius, chief executive officer of the California Building Industry Assn. “The fact remains that we’re only building 150,000 units this year in a marketplace that really needs 250,000.”
California also continues to see strong job growth, further increasing the demand for housing and driving prices up.
“We’re selling out of every phase we release in Orange County,” said Dan Nahabedian, vice president of product development and market research at John Laing Homes, which builds homes in California in Orange County, the Inland Empire, Los Angeles and Sacramento. “Obviously interest rates hurt us, but that’s overshadowed by an incredible shortfall of housing and strong job growth.”
But economists and developers say that, if left unchecked, rising housing costs could dampen the new housing market here in the near future.
“Affordability is really a problem in California, so we are going to get to the point where no one will be able to afford a home,” said John Burns, a principal at the Meyers Group, an Irvine-based provider of new home real estate information.
In fact, new home sales in the state as a percentage of overall home sales have been falling over the last few years because new home prices far exceed prices for existing homes.
In 1998, new home sales comprised about 20% of overall home sales in the state. In 1999 this number fell by half, with new homes making up about 10% of overall home sales, said Alfred J. Gobar, a Placentia-based real estate economist.
This phenomenon has led some developers here to say that they hope rising mortgage interest rates will cool the market a bit so that demand will slacken and prices will fall.
And while area economists are predicting a slowdown in the number of building permits issued in California this year, they still expect building permits for single-family units in the state to increase by 2.3% in 2000.
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Housing Starts
Mortgage interest rate hikes pushed national housing starts into steep decline in May. The West also saw a drop, but new home construction in California remained steady. Seasonally adjusted housing starts:
*
U.S. housing starts (in millions)
1.59 million
*
Western states* housing starts (in thousands)
374,000
*
*Western states are Alaska, Arizona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Montana, Oregon, Utah, Washington and Wyoming
Source: Commerce Department
