Starts of new U.S. housing rose in August to the highest level in more than two years, heightening expectations the Federal Reserve will raise interest rates next week to slow an economy that continues to show unexpected strength.
Housing starts rose 4.5 percent last month to an annual rate of 1.525 million, as all regions reported gains except the Midwest, Commerce Department figures showed.
Bonds and stocks slumped on this latest sign that strong labor markets and strong consumer confidence are helping to offset the effects of higher mortgage rates, analysts said.
“It will be difficult to continue selling the economic slowdown story without at least some signals of a pause or slowdown in the interest-sensitive sectors,” said Anthony Chan, chief economist at Banc One Investment Advisors Corp., in Columbus, Ohio.
Fed officials are on record as saying they’re looking for signs of slower growth to ensure that inflation doesn’t stir from its present low level. Without such signs, the central bank may push borrowing costs higher by a quarter point or more at a policy meeting Tuesday.
Rather than falling 0.9 percent as analysts had expected, August housing starts rose to the highest level since March 1994. In July, starts fell a revised 2.0 percent, previously reported as a 1.3 percent loss.
America’s economy “is perking right along,” said Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Mass. That suggests Fed officials “are going to bite the bullet” and raise the overnight bank lending rate.
Not all analysts are convinced that will happen, however. For one thing, the government also reported that permits for new housing construction fell 4.4 percent nationwide in August–to 1.393 million at an annual rate–after increasing 3 percent in July, suggesting that a slowdown may still be in the cards.
All of the strength in the housing report came in the single-family construction category. It surged 8.3 percent in August–the largest gain since July 1995–while multifamily projects dropped 9.5 percent from July.
The strength in the single-family sector is particularly important because multifamily starts are considered far more volatile depending on business market conditions. Single-family starts, however, are driven by consumers, whose spending accounts for almost two-thirds of all economic activity.
By region, housing starts advanced 13.5 percent in the West in August to 378,000 at an annual rate; increased 7 percent in the Northeast to 138,000; rose 2.7 percent in the South to 667,000; but declined 2 percent in the Midwest to 342,000.
Mortgage rates seesawed in the first half of the year, dipping just below 7 percent in mid-February–and then rising above 8 percent. The average rate on a 30-year fixed rate loan fell to 8 percent in August from 8.25 percent in June. That put the average payment on a $100,000 loan at $733.76 last month, down from $751.27 in July.
Last week, the average rate on a 30-year mortgage declined to 8.28 percent from 8.34 percent a week earlier, according to the Federal Home Loan Mortgage Corp.
Looking ahead, a National Association of Home Builders survey released last week suggested that prospects for the U.S. housing market deteriorated during September.
The NAHB’s housing market index declined to 56 in September, from 57 in August. A reading over 50 suggests more survey participants are seeing “good” conditions than “poor” conditions for home sales.
“Unless interest rates fall, which is unlikely, it appears that the weakening of the market is going to continue for the remainder of the year,” said Randy Smith, president of the trade group and a home builder in Walnut Creek, California. “Builders are seeing fewer people shopping.”
