The bite of higher interest rates grows deeper. Starts of new housing construction plummeted 9.8 percent in January-the largest drop in a year-and first-time unemployment claims increased last week, government figures showed this week.
“We’ve had quite a few signs things are slowing down,” said Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Massachusetts. “The Fed can take a little satisfaction in this.”
The Commerce Department said in its report released Thursday that all regions of the country reported fewer new home starts in January, and the weakness was concentrated in starts of single-family homes. “This big a drop in housing can’t be explained away with bad weather,” Latta said, although floods caused severe damage to parts on California.
January’s annual rate of housing starts declined to 1.377 million after falling a revised 0.6 percent during December, the Commerce Department said. The December number was first reported a month ago as a loss of 1.0 percent.
Before Thursday’s report, economists had anticipated a 2.7 percent decline in total housing starts for January, according to a survey by Bloomberg Business News.
“Housing affordability is declining,” said William Sullivan, an economist at Dean Witter Reynolds in New York. “It’s the influence of higher interest rates.”
The average monthly payment for principal and interest on a $100,000, 30-year fixed-rate loan at January’s average of 9.15 percent was $815.44. That’s more than 25 percent higher than the $647.93 payment for the same-sized loan when rates bottomed at 6.74 percent in October 1993.
“Our business has been soft,” said Joseph Sicree, a vice president at Toll Brothers, Inc., a home builder in Huntington Valley, Pa. “People are doing a hiccup about increased interest rates. They got comfortable with the 7 percent mortgage.”
Still, mortgage rates have declined in recent weeks amid signs of a slower pace of economic growth.
“In no way is this a last gasp for housing,” Sullivan said. He noted that February’s lower rates are already triggering an increase in applications for new mortgages. Additionally, the January figures tend to be more volatile than other months.
Last week, the average rate on a 30-year mortgage stood at 8.80 percent, down from 8.94 percent the previous week, according to the Federal Home Loan Mortgage Corp.
Builders’ borrowing costs-another key determinant of the level of new construction-are also higher than a year ago after the Fed’s actions.
While some analysts are projecting a leveling off in housing starts, Robert Davis, chief economist at the trade group America’s Community Bankers, is calling for a 15 percent drop this year from 1994. “The housing numbers are down because of the cumulative effect of interest rates increases,” Davis said. “This is part of the whole economy-with housing leading the way-dropping to a lower growth track.”
It has taken almost a year of interest rate increases by the Fed to temper demand for housing. The first of seven rate increases was announced Feb. 4, 1994. The most recent action came on Feb. 1 of this year.
As housing demand wanes, it also pulls down demand for goods such as appliances, furniture and building materials, ultimately slowing output from the nation’s factories. In an early sign of a slowdown in manufacturing, the Federal Reserve reported yesterday that industrial production rose by a less-than-expected 0.4 percent in January.
This week, the Federal Reserve Bank of Philadelphia said its business conditions index for February edged slightly higher, although manufacturers’ outlook for the next six months fell to its lowest point in more than four years.
“Future economic indicators suggest that manufacturers expect some slowing of growth over the next six months,” the Philadelphia Fed’s report said.
The report also showed fewer manufacturers in the Philadelphia region reported paying higher prices for raw materials.
The Fed is aiming to cut economic growth from 4 percent in 1994 to around 2.5 percent, which would allow businesses to continue to expand without the threat of accelerating inflation, analysts said.
In Thursday’s report, the Commerce Department also said permits for new construction declined 8.6 percent in January to an annual rate of 1.299 million after rising 4.9 percent in December.
By category, single-family housing construction dropped 12.3 percent in January to 1.072 million homes at an annual rate after increasing 3.1 percent during December.
Multifamily projects, like apartments and condominiums, rose 0.3 percent in January to an annual rate of 305,000 after declining by 13.1 percent during December.
By region, housing starts declined by 16.8 percent in the Northeast last month to 114,000 homes at an annual rate; dropped 11.7 percent in the Midwest to 302,000, fell 8.6 percent in the South to 635,000, and decreased 7.6 percent in the West to 326,000.
The Labor Department’s report, also released Thursday, showed a higher-than-expected 20,000 first-time claims for unemployment benefits were filed in the week ending Feb. 11. It was the largest weekly increase since July.
A less volatile measure of labor markets, the four-week average for claims, was little changed.
Analysts said after the ups and downs of hiring and layoffs during the holiday season, the average level of weekly claims has returned to the same level as last fall-about 325,000-and isn’t likely to change until the economy shows clearer evidence of a slowdown.
Nevertheless, the weaker-than-expected report means “you better be cautious,” said Astrid Adolfson, an economist at MCM MoneyWatch in New York. “It could signal a real weakening” in hiring. If factories and construction companies start shedding jobs in the months ahead, those cutbacks could foreshadow a rising unemployment rate, Adolfson said.
