Builders broke ground on fewer new homes in December, the Commerce Department said last week, but 1994 proved to be the strongest year for construction in six years despite escalating interest rates.
Starts on new single-family homes and apartments eased in December by a relatively moderate 1.0 percent to a seasonally adjusted annual rate of 1.53 million. That followed an upward revised jump of 7.6 percent in November.
But for the full year, a total 1.45 million new homes were started, a sharp 12.9 percent rise from 1993. It was the most vigorous building rate since 1.49 million starts in 1988.
Economists and analysts said booming job growth and innovative financing, especially adjustable-rate mortgages, gave the housing sector surprising resilience in the face of costlier credit.
Unusually mild weather also helped builders, said economist Marilyn Schaja of Donaldson, Lufkin & Jenrette Securities Corp. in New York. “But the data nevertheless indicate that the rate of starts is hardly responding to higher mortgage interest rates.”
Mortgage rates rose steadily throughout 1994 as the Federal Reserve pushed short-term interest rates up six times to try to cool the pace of economic activity and sustain the expansion. The central bank is expected to raise rates again when its policy-setting committee meets Jan. 31 and Feb. 1.
The Federal Home Loan Mortgage Corp., or Freddie Mac, said a 30-year fixed-rate mortgage carried a rate of 9.05 percent this week. It was the second straight week that rates fell, but they remain far above the low of 6.74 percent touched in October 1993.
Consumers remain buoyant, however, with the University of Michigan Board reporting Friday that its consumer sentiment survey surged to 99.1 in January from 95.1 in December. The survey is issued only to paying customers.
“What’s really clear is that the continued improvement in employment . . . is finally allaying fears that there will be a new corporate downsizing and layoffs,” economist Ken Goldstein of the Conference Board told Reuters.
With national economic growth predicted to slow during the second half of this year, housing starts are seen declining by between 5 and 10 percent from 1994.
“Basically we had a battle between the economy and interest rates in 1994 and the economy won,” said economist David Lereah of the Mortgage Bankers’ Association.
“But these rates are just too high for sustained growth and they’re going to get worse before they get better,” he said, likely dragging 1995 starts down by as much as 9 percent from last year.
Tommy Thompson, a Kentucky-based builder who is president of the National Association of Home Builders, said interest rates were the obvious key for housing, as shown by the massive switch to adjustable-rate mortgages.
These mortgages, which can be adjusted generally once a year but start at a lower rate than a fixed mortgage, climbed to 60 percent of all loan applications by year-end from 15 percent a year earlier.
Thompson said Fed Chairman Alan Greenspan was scheduled to address builders at their annual meeting in Houston next week, an opportunity to lobby for restraint in future rate rises.
In its report on December construction, the Commerce Department revised the increase in November housing starts upward from a previously reported 6.9 percent gain.
During December, construction starts on new homes fell sharply in the Northeast and the Midwest, but there were small gains from November in the South and West.
Overall, the December starts level was down 5.1 percent from the seasonally adjusted annual rate of 1.61 million units begun a year earlier, when the housing industry hit a cyclical peak.
Still, applications for permits to build new homes were up slightly in December, by 0.6 percent to a seasonally adjusted annual rate of 1.40 million after falling in November by 0.7 percent.
Regionally, housing starts fell 10.7 percent last month in the Northeast to an annual rate of 142,000 units while in the Midwest they dropped 11.8 percent to a rate of 335,000.
But in the South, starts rose 4.0 percent to a rate of 695,000, and in the West they were up 5.6 percent to 357,000 a year.
