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The Honolulu Advertiser
Posted on: Wednesday, June 21, 2006

Housing starts rise 5 percent in May

By Martin Crutsinger
Associated Press

WASHINGTON Construction of new homes and apartments nationwide, down for three straight months, staged what may turn out to be a temporary rebound in May.

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 they said potential homebuyers could see some benefits in the form of more builder incentives being offered to move unsold inventory.

The Commerce Department said yesterday that builders started construction at a seasonally adjusted annual rate of 1.957 million units last month, a better-than-expected 5 percent gain from April when construction had fallen 5.5 percent.

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 is likely to slide further in coming months as the housing industry continues to slow, but not crash, under the impact of rising mortgage rates.

They noted that applications for new building permits, considered a good sign of future activity, fell for a fourth straight month, declining 2.1 percent to a seasonally adjusted annual rate of 1.932 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 start dumping those properties back on the market now that prices are no longer soaring.

David Seiders, chief economist for the National Association 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 paying closing costs to keep selling homes..

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

Currently, the nationwide average for a 30-year mortgage is 6.63 percent, up a full percentage point from a year ago. But analysts are concerned that those rates could go significantly higher if the Federal Reserve, which has raised rates 16 times, keeps tightening because of inflation worries. The Fed will meet again for a two-day session beginning next Wednesday.

Seiders believes home prices, which had been climbing at double-digit rates, would slow to year-over-year gains of just 4 percent 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 percent to an annual rate of 1.586 million units while construction of multifamily units was up an even stronger 19.7 percent to an annual rate of 371,000 units.

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