Originally created 11/21/02

Housing construction plunges in October

WASHINGTON -- Housing construction lost momentum in October, plunging by 11.4 percent, the biggest drop since 1994.

But even with the sharp decline - which came after the level of housing construction shot up to a 16-year high in September - the number of housing units for which builders broke ground in October was still considered to be in the healthy zone.

Builders began work on 1.60 million housing units, at a seasonally adjusted annual rate, representing a 11.4 percent decline in October from the previous month, the Commerce Department reported Wednesday.

While October's housing activity level was weaker than analysts were expecting, economists predicted September's red-hot pace could not be sustained. Housing construction jumped by 11 percent in September to a rate of 1.81 million units, the highest level since December 1986.

The 11.4 percent drop in housing construction in October marked the biggest decline since January 1994. The 1.60 million rate of housing units under way was the lowest level since April.

"The good news is that the level of housing activity is still very strong, but the bad news is housing construction is probably maxed out in terms of how much it will contribute to economic growth," said Ken Mayland, president of ClearView Economics. "The housing construction market is in good shape, but September was probably the high-water mark," he added.

In Wednesday's report, construction of new single-family homes fell 7 percent in October to a rate of 1.35 million. Work on apartments, condominiums and other multifamily housing plummeted by 31.4 percent to a rate of 221,000 last month.

Even with the slowdown in construction in October, the housing market remains in good shape. Stoked by low mortgage rates, home sales are expected to post records this year.

The average rate on a 30-year fixed-rate mortgage dropped to 5.94 percent last week, the lowest level since mortgage giant Freddie Mac began tracking these rates in 1971.

It marked the seventh time this year that rates on this benchmark mortgage hit a new low.

Low mortgage rates this year have been feeding a refinancing boom. The extra monthly cash that consumers are saving by refinancing their mortgages at lower interest rates is helping to support consumer spending, which has been the main force keeping the economy going this year.

Those factors have helped to offset some negative forces, including the turbulent stock market.

Against this backdrop, home builders are optimistic about sales for November as well as within the next six months, the National Association of Home Builders says.

"With long-term mortgage rates slipping below 6 percent, builders are certainly finding buyers who can qualify to purchase homes in most price ranges right now," says the association's president Gary Garczynski.

Builders in some areas, however, are reining in sales expectations for homes in the top price ranges as portfolios of affluent prospective buyers took a big hit during the stock market slide this year, Garczynski said.

Wanting to energize the economic recovery, the Federal Reserve earlier this month cut a key interest rate by a bold, half a percentage point to a 41-year low of 1.25 percent. That marked the Fed's first rate reduction this year and the 12th since January 2001.

Fed policy-makers hope low interest rates will induce consumers to spend more and businesses to ramp-up investment, boosting economic growth.

By region, in the Northeast, housing construction in October fell 18.8 percent from the previous month to a rate of 143,000. In the Midwest, construction dropped by 19.5 percent to a rate of 301,000, and in the South the number of housing projects under way went down by 14.3 percent to a rate of 701,000. But in the West, housing construction rose 3.6 percent to a rate of 458,000.

Housing permits, a good barometer of current demand, rose 1.7 percent in October to a rate of 1.76 million, an encouraging sign, economists said.


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