Housing construction down 3.6 percent in June, economy follows

Posted: Thursday, July 18, 2002

WASHINGTON -- Housing construction, which has helped fuel the sputtering economy, declined in June after a bounce the month before, signaling the sector may be losing steam.

Builders broke ground last month on 1.67 million units at a seasonally adjusted annual rate -- a 3.6 percent drop from the May level, the Commerce Department reported Wednesday.

In May, housing construction increased by 10.8 percent, according to revised figures. That increase, which was smaller than the government previously reported, follows a drop in April.

Mild weather early in the year helped to power housing construction, which remained solid throughout last year's recession. But analysts have been predicting a slowdown, saying that those robust levels can't be sustained.

The Federal Reserve, citing worries about the strength of the economic rebound, has opted at each of its four meetings this year to leave short-term interest rates at 40-year lows. Growing numbers of economists believe the Fed might leave rates unchanged for the rest of the year.

One of the Fed's concerns is how consumers, who kept buying big-ticket items such as houses and cars throughout the slump, would hold up.

But consumers, whose spending accounts for two-thirds of all economic activity, have continued to open their wallets despite the spotty recovery and the sour stock market, Federal Reserve Chairman Alan Greenspan told Congress on Tuesday.

Weak stocks have yet to crimp consumer spending because of offsetting boosts from low interest rates, solid appreciation in home values and extra cash from refinancing.

''The fundamentals are in place for a return to sustained healthy growth,'' he said.

Business spending, however, has remained weak, Greenspan said. It was deep cuts in capital spending that helped push the economy into recession last year.

By keeping interest rates low, the Fed might motivate consumers to keep spending and businesses to step up investment, both of which would bolster economic growth.

Wednesday's report showed that construction of single-family homes fell by 2.9 percent in June to a rate of 1.35 million units. That followed a 10.2 percent surge in May.

Work on multifamily housing, which includes apartments and condos, dropped by 6.9 percent last month to a rate of 285,000.

By region, housing starts rose by 6.1 percent in the Northeast to a rate of 175,000. In the Midwest, they dipped by 0.9 percent to a rate of 344,000. In the South, housing construction plunged by 7.6 percent to a rate of 744,000. The West also saw a drop, by 2.2 percent, to a rate of 409,000.

Even with the slowdown in home construction, analysts predict the sector will continue to be healthy. Low mortgage rates and solid housing appreciation make purchasing a home an attractive investment.

Mortgage rates have been hovering below the 7 percent mark, providing prospective home buyers with good financing conditions. Last week, the average rate on a 30-year fixed-rate fell to 6.54 percent, down from 6.57 percent the previous week, according to Freddie Mac, the mortgage company. A year ago, 30-year mortgages averaged 7.21 percent.

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