Housing Starts Rebound With 5% Growth in May

Construction of new homes and apartments, down for three straight months, staged what might turn out to be a temporary rebound in May, according to data released Tuesday.

Despite the one-month improvement, analysts said higher mortgage rates would continue to buffet the once high-flying housing market for the next two years. But potential home buyers could see some benefits in the form of more incentives being offered by builders to move unsold inventory, analysts said.

The Commerce Department reported that builders started construction at a seasonally adjusted annual rate of 1.96 million units last month, a better-than-expected 5% gain from April when construction had fallen 5.5%.

Analysts attributed the increase to an unusually dry spring in many parts of the country that allowed builders to start work on more new homes.

But they cautioned that construction activity was likely to slide in coming months as the housing industry continued to slow, but not crash, because of rising mortgage rates.

Analysts noted that applications for new building permits, considered a sign of future activity, fell for a fourth straight month, declining 2.1% to a seasonally adjusted annual rate of 1.93 million units.

“The longer-term trends are downward but it is not a disaster,” said David Wyss, chief economist at Standard & Poor’s in New York. “We are not expecting a housing bust, just a housing slowdown.”

A monthly survey of builder confidence plunged in May to its lowest level in 11 years as builders expressed concerns about rising mortgage rates and whether investors who bought houses during the boom years might dump those properties on the market now that prices are no longer soaring, which could further depress prices.

David Seiders, chief economist for the National Assn. of Home Builders, the group that conducts the survey, said that for now builders were coping by throwing in incentives such as kitchen upgrades, free decks and fireplaces, or by paying closing costs.

According to a recent survey, Seiders said, 53% of builders were including optional items at no cost, up from 33% who said they were doing so a year ago, while 42% were paying a part of closing costs, up from 28% a year ago.

Seiders said he believed home prices, which had been climbing at double-digit rates, would slow to year-over-year gains of 4% by the middle of next year, and some of the hottest markets could see price declines.

For May, construction of new single-family homes was up 2.1% to an annual rate of 1.59 million units while construction of multifamily units was up an even stronger 19.7% to an annual rate of 371,000 units.

The strength in May was led by a 15.8% jump in construction activity in the West. Construction rose 8.5% in the South and 1.7% in the Northeast. Construction fell 15.8% in the Midwest.