Housing falters at end of year

Published: Friday, January 20, 2006 at 6:01 a.m.
Last Modified: Friday, January 20, 2006 at 12:02 a.m.
Home building cooled in December, but even with the weakness 2005 was a record year.
The Commerce Department reported Thursday that construction of single-family homes and apartments totaled 2.065 million units last year. That was an increase of 5.6 percent over 2004 and pushed total construction to the second highest level on record, exceeded only by 2.357 million units built in 1972.
Construction of single-family homes did hit an all-time high for the third straight year, rising to 1.714 million units, up 6.4 percent from the previous record of 1.611 million single-family homes built in 2004.
That performance came despite the fact that housing activity dropped by 8.9 percent in December, the biggest decline in nine months.
Part of that fall-off was attributed to the weather. Unusually mild weather in November had boosted construction while wet and cold weather in many parts of the country depressed December activity.
Analysts said they also believed the December decline was reflecting the start of a cooling-off period for construction as builders face rising inventories of unsold homes due to weakening demand.
"The expected pullback in housing is clearly underway," said Joel Naroff, chief economist at Naroff Economic Advisors. "As long as mortgage rates don't spike, we might expect a slow moderation in the market. But if rates do pop, watch out."
Sales of new and existing homes have been at all-time highs in 2005, marking the fifth straight year of record sales.
But economists believe those sales will taper off in 2006 and construction will be down as well.
Michael Carliner, senior economist at the National Association of Home Builders, predicted that construction activity would drop by around 6.5 percent in 2006 with sales down by a similar amount.
He predicted that home prices, which have doubled over the past decade, will see a slowing as well. Instead of climbing at annual rates of 10 percent or more, Carliner predicted that home prices would probably rise by around 5 percent in 2006.
While some analysts have worried that housing has been griped by the same speculative frenzy that took control of the stock market in the late 1990s, most economists believe the slowdown in housing will have less severe consequences for the overall economy.
"I think the most likely scenario is that housing euphoria slowly deflates but doesn't burst," said Mark Zandi, chief economist at Moody's Economy.com.
He said his optimistic scenario could be put in jeopardy if the Federal Reserve feels the need to raise interest rates more than presently expected to combat inflation. Many economists believe the Fed will boost rates for a 14th time on Jan. 31 and then raise rates one last time on March 28.
Easing concerns about inflation have sent mortgage rates lower in recent weeks. Freddie Mac reported on Thursday that rates on 30-year mortgages dropped for a sixth consecutive week, falling to 6.10 percent, the lowest level in three months.
Meanwhile, the Labor Department reported Thursday that the number of Americans filing claims for unemployment benefits dropped to 271,000 last week, the lowest level since April 2000.
The unexpectedly sharp decline of 36,000 claims from the previous week provided further evidence that the labor market continues to show strength. The four-week moving average for claims, which smooths out volatility, declined by 12,000 to 299,000 last week, the lowest reading sine October 2000.
Some economists said weekly jobs claims at this level would be consistent with a monthly employment gain for January of around 250,000, up significantly from the 108,000 jobs created in December.
The housing report showed that building activity in December fell by 12.3 percent for single-family homes while multifamily construction rose by 10.2 percent.
Applications for building permits, considered a good indicator of future activity, fell by 4.4 percent in December to an annual rate of 2.068 million units.
Construction activity fell in every part of the country except the South where building rose by 5.2 percent, a gain analysts said reflected better weather than much of the rest of the country plus some initial activity in rebuilding following the fall hurricanes.
Construction activity fell by 23.6 percent in the Midwest and was down 21.7 percent in the West and 14 percent in the Northeast.
--- On the Net: Housing construction: http://www.census.gov/newresconst
Jobless claims: http://www.ows.doleta.gov

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