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U.S. Economy: Housing Starts Rise to 2.009 Mln Pace (Update5)

U.S. Economy: Housing Starts Rise to 2.009 Mln Pace

June 16 (Bloomberg) -- U.S. housing starts rose 0.2 percent last month as low mortgage rates and an improved job market kept homebuilders on pace for their best year since 1978.

Builders broke ground at an annual rate of 2.009 million housing units in May, the fastest in three months, after 2.005 million in April, the Commerce Department said today in Washington. New claims for jobless benefits rose last week, and manufacturing contracted in the Philadelphia region this month for the first time in two years, other reports today showed.

The housing starts add to evidence of strength in real estate as home sales head for a fifth straight record year and prices escalate, prompting Federal Reserve Chairman Alan Greenspan to worry about speculative ``froth.' Workers are finding jobs, tame inflation is giving them more spending power, and mortgage rates linked to 10-year Treasury note yields are staying low even as the Fed raises short-term rates.

``This is an extremely strong reading,' said Ken T. Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who predicted a 2 million rate for housing starts. ``With the decline in bond yields and mortgage rates, consumers have had another chance to get another bite out of the apple here.'

The number of U.S. workers filing initial applications for unemployment benefits rose by 1,000 last week to 333,000, the Labor Department said. The level remains consistent with gradual improvement in the job market, economists said.

Philadelphia Fed

The Federal Reserve Bank of Philadelphia reported today that its regional factory index for June fell to minus 2.2. It was the first negative reading, signifying contraction, since May 2003. A report earlier this week from the New York Fed showed expansion. The Philadelphia Fed's outlook index for six months from now rose to 30.6, the highest this year, indicating the slowdown may be temporary.

Building permits, a sign of future construction, fell 4.6 percent in May to an annual rate of 2.05 million units. April's rate of 2.148 million was the highest in more than three decades.

The median forecast in a Bloomberg News survey of economists called for 2.05 million housing starts last month, up from the government's original estimate for April of 2.038 million. Permits were forecast to drop to 2.109 million.

U.S. 10-year Treasury notes rose after the Philadelphia report. The benchmark note due in 2015 increased 1/16 point, pushing the yield down 1 basis point to 4.09 percent at 1:31 p.m. in New York.

Single-family home starts rose 4.7 percent in May to a 1.704 million-unit annual pace, the fourth highest on record. Starts of townhouses, apartments and other multifamily dwellings fell 19 percent to a 305,000 rate.

Growing Backlogs

Starts increased in all regions but the South, where they fell 12 percent to a 903,000-unit annual rate. Starts rose 12 percent in the West to 540,000. They rose 19 percent in the Midwest to 381,000, and 5.1 percent in the Northeast to 185,000.

Growing backlogs will keep builders occupied. The number of housing units authorized but not yet started was up 21 percent from May 2004. ``The boom in residential construction shows no sign of abating at this point,' said David Greenlaw, chief U.S. fixed income strategist at Morgan Stanley in New York.

Residential construction has grown at an 8.8 percent annual rate in the first quarter, faster than the 3.5 percent for the economy in general. Production of construction supplies grew at a 4.5 percent annual rate in the first quarter, faster than the 3.5 percent rate for all industry, the Fed reported yesterday.

Construction has accounted for 141,000 of the 898,000 jobs added in the U.S. this year, and more hiring is likely: a survey by Manpower Inc. said U.S. hiring expectations for the third quarter were highest among construction companies, with 43 percent saying they planned to add workers.

Mortgage Rates

The Federal Reserve's beige book survey of regional economic conditions, released yesterday, found that ``residential real estate markets remained strong' in most parts of the country. The report also noted that the pace of economic growth in the Philadelphia region eased from mid-April through May, in contrast with most regions.

The National Association of Home Builders said yesterday its measure of U.S. homebuilder optimism rose to 71, a high for the year, from 70.

One reason for confidence is the low cost of borrowing. Fannie Mae, the largest U.S. mortgage company, forecast today that the fixed rate on a 30-year mortgage will average 5.64 percent this year, the lowest annual average on record, compared with 5.84 percent in 2004. The rate was 5.63 percent this week, according to Freddie Mac, the No. 2 company.

The drop in rates while the Fed has increased short-term borrowing costs has puzzled economists including Greenspan, who calls the situation a ``conundrum.' The Fed is forecast to raise its overnight bank lending rate for a ninth straight time, to 3.25 percent, at the end of this month, based on the median forecast in a Bloomberg survey.

The yield on the benchmark 10-year bond has fallen from 4.69 percent just before the Fed starting raising the overnight bank lending rate a year ago.

`Froth'

U.S. home sales will top 8 million this year, the fifth consecutive record, the National Association of Realtors said June 8. The group forecast housing starts would climb to more than 2.02 million units, the most since 1973. The National Association of Home Builders has a more modest forecast for starts, an increase to 1.969 million, the most since 2.02 million in 1978.

``Housing demand is very solid and very steady,' Ara Hovnanian, chief executive of hombuilder Hovnanian Enterprises Inc. in Red Bank, New Jersey, said in an interview. ``The frothiness we saw in much of the past two years in some of the markets has stabilized. That is good.'

Fed officials are watching housing data for evidence of excess speculation that is driving up prices.

Greenspan told Congress on June 9 there were ``signs of froth' and ``speculation' in some local markets, which were rising to ``unsustainable' levels. Even so, he and other Federal policy makers have said the excesses are limited to certain regions of the country.

``It's important to remember that even if there is a bubble in only a few areas, on the coasts and so forth, if that bubble bursts, it will have consequences for the whole national economy,' said Jay Mueller, senior portfolio manager at Wells Capital Management in Menomonee Falls, Wisconsin, in an interview.

To contact the reporter on this story:
Courtney Schlisserman in Washington at [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000103&sid=aHe4y0qyEuks&refer=us