West paces home-building

Thursday, Sept. 19, 1996 | 11:59 a.m.

WASHINGTON -- Housing starts unexpectedly shot up 4.5 percent in August to the highest level in nearly 2 1/2 years, the government said today in its last major economic report before an important interest-rate policy meeting next week.

The West showed a the biggest increase for the month regionally, but statistics for Southern Nevada won't be available until next week.

Analysts are divided over whether the Federal Reserve will find it necessary to tighten credit or whether it will determine the economy is slowing sufficiently on its own to prevent a new round of inflation.

The Commerce Department said construction of new homes and apartments totaled 1.53 million at a seasonally adjusted annual rate, up from a revised 1.46 million in July. It was the highest since a 1.53 million rate in March 1994.

Regionally, starts climbed 13.5 percent in the West to a 378,000 rate. They were up 7 percent in the Northeast to 138,000 and 2.8 percent in the South to 667,000. But they declined 2 percent in the Midwest to 342,000.

The stronger-than-expected report sent stock and bond prices lower in early trading. Analysts had expected a 1.4 percent decline.

The new data showed that starts fell 2 percent in July, more than the original 1.3 percent estimate. But it also showed that construction in June rose 0.8 percent rather than a earlier reported 0.3 percent decline.

The latest increase could bode well for other areas of the economy since home buyers often buy new appliances and other furnishings.

Many analysts expect the overall economy to slow during the second half of the year from its strong second-quarter growth. If not, the Federal Reserve is prepared to boost short-term interest rates to prevent any escalation of inflation. Fed policy-makers next meet on Tuesday.

So far, there is little evidence that prices are rising. Consumer inflation rose just 0.1 percent in August. But analysts are concerned that tight labor markets will lead to increased wages and eventually higher prices.

In another report suggesting moderate economic growth, the Labor Department said new claims for jobless benefits fell 2,000 last week to a seasonally adjusted 329,000.

And, it added, unemployment insurance claims a week earlier totaled just 331,000, rather than the 338,000 it initially estimated.

Although starts during the first eight months of 1996 were 11.5 percent above those of the same period a year ago, anecdotal evidence suggests a slowdown may be in the offing.

Applications for building permits -- often a barometer of future activity -- fell 4.4 percent in August to a 1.39 million rate, the third decline in four months. Permits for single-family homes -- 80 percent of new residential construction -- were flat after falling for three months.

Also, the National Association of Home Builders reported Wednesday its Housing Market Index fell in September for a fourth straight month. All three index components declined -- current sales, traffic by prospective buyers and sales expectations over the next six months.

"These decreases in the index can be attributed primarily to higher interest rates as many builders are reporting some weakening in demand for their new homes," explained Randy Smith, association president and a Walnut Creek, Calif., builder.

Thirty-year, fixed-rate mortgages averaged 7.95 percent in August, down from 8.25 percent in July but well above last January's average of 7.03 percent. Still, rates have bounced back, averaging 8.28 percent last week.

The monthly payment on a $100,000 mortgage with a 7 percent interest rate is $665, while the payment on the same loan with an 8.5 percent rate is $769 -- a difference of $104.

New home sales remained above a 700,000 annual rate in July for the seventh straight month, the longest such string in 10 years.

Analysts attribute the strength to continuing job and income growth and upbeat consumer attitudes toward the economy. In addition, many buyers are shifting to lower-cost adjustable rate mortgages from conventional long-term loans.

Single-family starts jumped 8.3 percent to a 1.24 million rate, wiping out a 5.5 percent drop in July. It was the biggest increase since an 8.6 percent gain in July 1995 and the highest level since a 1.28 million rate in March 1994.

Construction of apartment and condominiums, often volatile but not as sensitive to interest-rate changes, fell 9.5 percent to a 287,000 rate. It had shot up 12.8 percent in July.