Housing starts point to economic slowdown Federal Reserve leaders

Journal Record, The (Oklahoma City), May 20, 1998

WASHINGTON (Bloomberg) -- U.S. builders began construction on fewer houses in April and Federal Reserve policymakers left interest rates unchanged, both signs Tuesday the economy is expected to cool from its first quarter pace.

Housing starts unexpectedly fell 2.3 percent last month to a 1.538 million-unit annual rate, Commerce Department figures showed Tuesday. In March, housing starts fell 2.5 percent to a 1.575 million rate.

Analysts had expected an increase in starts last month. Even so, April marked the eighth straight month that starts exceeded 1.5 million at an annual rate -- the longest stretch at that pace since a run from May 1983 through November 1987. Housing "could slow down, but right now it's pretty strong," said Steven J. Hilton, managing director at Monterey Homes in Scottsdale, Ariz. "Even if it slows 10 percent, it's not going to be that big of a deal." In a move that was expected, the Fed's Open Market Committee left the target rate for overnight lending between banks at 5.50 percent at its meeting Tuesday. Bonds were little changed after the decision was announced, with the Treasury's benchmark 30-year bond yielding 5.93 percent. The housing market this year has enjoyed the benefits of low mortgage rates, growing incomes, job gains and high consumer optimism. And the Fed's decision should benefit housing since it doesn't put pressure on lenders to raise mortgage costs. Housing starts surged in February to a 1.616 million-unit rate, the highest level since January 1989. As long as housing demand stays robust, consumers will continue to purchases appliances and furniture to fill their new homes, analysts said. One of the big beneficiaries of the boom is the home-improvement industry. "Renovations, reconstruction, additions and improvements will carry the housing industry and the economy," said Richard Yamarone, senior economist at Argus Research in New York. Home Depot, the nation's largest home-improvement retailer, said its fiscal first quarter earnings rose a stronger-than-expected 30 percent on increased sales of lumber and other building materials. Atlanta-based Home Depot's net income rose to $337.3 million, or 45 cents a diluted share, from $258.8 million, or 35 cents, a year earlier. And North Wilkesboro, N.C.-based Lowe's said its first quarter earnings rose a better-than-expected 34 percent on higher sales of lumber and home-decorating products. The No. 2 U.S. do-it-yourself home-improvement retailer's net income rose to $94.5 million, or 54 cents a diluted share, from $70.4 million, or 41 cents, in the same period a year ago. Construction starts of multifamily buildings fell 13.4 percent in April, while starts of single-family homes rose 0.7 percent, government figures showed. The report also showed permits for new home construction, often viewed as a barometer of ground breaking, fell 3.3 percent to a 1.518 million annual rate in April after falling 4 percent in March. The decline in April permits, along with a smaller number of March permits than previously reported, suggests housing starts will slow in the months ahead, said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio. "The interest-sensitive sector is really starting to show more softness," Chan said. By region in April, housing starts fell 7.1 percent in the Northeast to an annual rate of 131,000; fell 2.8 percent in the South to a 692,000 annual rate; rose 4.5 percent in the Midwest to a 345,000 rate; and fell 5.6 percent in the West to a 370,000 rate. The robust housing market is producing windfalls for the country's home builders. Monterey Homes, which builds single-family homes in Arizona and Texas, reported its largest sales and backlog in company history during the first quarter. Orders at Atlanta-based Beazer Homes USA rose 48 percent in the first quarter and pushed backlogs to record highs. That should keep deliveries of those homes robust for the rest of the year even though sales will likely slow, said Beazer's president and chief executive officer, Ian McCarthy. Industry expectations rose this month. The National Association of Home Builders said Monday its May housing market index rose to 68 from April's 67, close to the high reached in December 1993, when the index hit 70. A reading above 50 suggests that more survey participants are seeing "good" economic conditions than "poor" ones for sales. Mortgage rates have inched up after reaching a four-year low 6.89 percent in early January. The rate on a 30-year fixed mortgage averaged 7.15 percent in April, up from March's 7.13 percent. Even so, 30-year mortgage rates have ranged between 7 percent and 7.22 percent since mid-November, and builders remain confident their industry will stay strong. "I believe that a 1 percent jump in mortgage rates will not impact our business," said Robert I. Toll, chairman and chief executive officer at Toll Brothers in Huntingdon Valley, Pa. "It may even spur demand by pushing vacillating buyers off the fence to take advantage of what would still be relatively low rates."