Housing starts rise again

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Housing starts rise again
New home building in the U.S. at record pace, beating forecasts, as housing market refuses to cool.

January 21, 2004: 10:13 AM EST
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - New home construction in the United States accelerated to a record pace in December, the government said Wednesday, defying Wall Street expectations for a decline and suggesting the red-hot housing market might not cool off any time soon.

The Commerce Department said the pace of housing starts rose 1.7 percent to a seasonally adjusted annual rate of 2.09 million units, after rising a revised 3.9 percent to 2.05 million units in November. Economists, on average, expected housing starts to dip to a 1.95 million-unit pace, according to Briefing.com.

Building permits, a forward-looking indicator of housing demand, rose 3.3 percent to an annualized rate of 1,924,000 units after falling 6 percent in November to a rate of 1,863,000 units.

"Recent speculation about the demise of the housing boom has been greatly exaggerated," said Anthony Chan, chief economist at Banc One Investment Advisors.

Chan pointed out, however, that starts of single-family housing units, which make up the bulk of all housing starts, fell 0.6 percent, while starts of multiple-family units -- a more volatile number -- jumped 15.7 percent. Chan called this "clear evidence that this sector will not continue rising forever."

U.S. stock prices were slightly lower in early trading after the report, while Treasury bond prices rose.

Housing to support GDP ... again
The housing market has been one of the strongest sectors of the economy in recent years, helped along by the lowest mortgage rates in a generation.

In turn, the housing market has helped support consumer spending, which makes up more than two-thirds of the total economy. A surge in home prices made homeowners feel wealthier, easing the sting of a three-year bear market in stocks, and a boom in mortgage refinancing cut mortgage borrowers' monthly payments and gave them some extra cash to spend.

Rates began to rise in the second half of 2003, stifling the refi boom and leading many analysts to expect the housing market to slow down in 2004. Sales of new and pre-owned homes did, in fact, slow down in October and November, the latest data available.

But interest rates have stayed stubbornly low, keeping housing demand high. Last week, the average rate for a 30-year mortgage fell to 5.66 percent, its lowest level since July 11, according to mortgage financing firm Freddie Mac.

In response, demand for mortgages rose last week to its highest level since the Mortgage Bankers Association started keeping track in 1990, the MBA said Wednesday.



And rates seem likely to stay relatively low for much of the year, with the Federal Reserve promising to keep them subdued. Fed policy makers meet next week to discuss interest rates and are widely expected to leave their key overnight lending rate at a 41-year low.

December's surge in housing starts could also support gross domestic product (GDP), the broadest measure of the economy, either in the fourth quarter of 2003 or the first quarter of 2004, or both, some economists said.

"Starts at year-end 2003 will provide additional support for GDP during the first two quarters of 2004 as construction activity gradually brings these buildings to completion," said Sherry Cooper, chief economist at BMO Nesbitt Burns.

Bubblicious?
Housing has been so strong, in fact, that some observers have worried there is a housing-market bubble, akin to the stock market bubble of the late 1990s. The fear is that home prices are artificially high and in danger of a sudden decline, which would hurt homeowners.

But most economists dismiss this worry. Even as they acknowledge some local housing markets may be in bubbles, they also say housing supply seems to be at an appropriate level -- unlike the late 1980s and early 1990s, when builders slapped together houses in a speculative frenzy that resulted in a glut of inventory and sudden price drop.

In Wednesday's report, the Commerce Department said December's housing-start gains were concentrated in the South, which saw a gain of 7.1 percent. Southern housing starts make up nearly half of all new home construction in the United States.

Starts in the West were nearly flat, while starts in the Northeast and Midwest fell 6.7 percent and 4.3 percent, respectively.