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U.S. ECONOMY Housing activity hits highest level in two decades

Thursday, February 17, 2005

Factory, mine and utilities output went unchanged.
WASHINGTON (AP) -- Construction of new homes and apartments rose 4.7 percent in January to the highest level in more than two decades as low mortgage rates continued to power the housing industry.
The Commerce Department reported Wednesday that builders began construction on 2.16 million units at a seasonally adjusted annual rate last month, compared with a rate of 2.06 million units in December.
The increase in January caught economists by surprise. They had forecast a decline of about 3.7 percent, reflecting rain in the West and winter storms in the East, which had been expected to hold down construction.
Instead, builders were enthused by continued low mortgage rates and broke ground on the largest number of new homes and apartments since February 1984, when construction starts hit an annual rate of 2.26 million units.
"With cheap mortgages the perfect aphrodisiac, the American love affair with housing continues and developers are more than willing to comply with their customers wishes," said Joel Naroff, chief economist at Naroff Economic Advisors. "Low mortgage rates trump everything else as the housing market continues to boom along."
Federal Reserve Chairman Alan Greenspan, delivering his semiannual economic report to Congress, gave a generally upbeat outlook. He said the economic expansion "has firmed, overall inflation has subsided and core inflation has remained low."
Analysts said they heard nothing in Greenspan's comments to make them think the Fed will alter its plans of gradual interest rates increases to ensure the rebounding economy does not generate unwanted inflation pressures.
Wall Street reacted with caution as investors worried that the strengthening economy will lead to higher interest rates. The Dow Jones industrial average lost 2.44 points to close at 10,834.88.
Factory output
In other economic news, the Fed reported that output at factories, mines and utilities was unchanged in January after a sharp 0.7 percent increase in December. Economists had predicted a healthy increase in industrial production of about 0.3 percent for the month.
Output at factories did increase by 0.4 percent, the same as in December. But output at utilities fell a sharp 3 percent, after an increase of 2.8 percent in December. The output in the mining sector, which includes petroleum production, dipped 0.3 percent after a gain of 0.9 percent in December.
The report on housing starts showed that construction of single-family homes rose 2.7 percent to 1.76 million units, a record. Construction of apartments climbed 14 percent, to 399,000 units.
Future housing growth
In a sign that housing activity should remain strong, applications for building permits rose by 1.7 percent to an annual rate of 2.1 million units in January. Permits for single-family homes were up 0.7 percent and permits for apartments rose 5.3 percent.
The housing industry has been the standout performer in the 3-year old economic expansion. Baby boomers, now in their peak earning years, are seeking bigger homes and vacation getaways, and their children are entering the housing market for the first time.
The industry has been bolstered by the lowest mortgage rates in more than four decades. In June, the Fed began a campaign to raise rates slowly to make sure a rebounding economy did not generate unwanted inflation.
Freddie Mac reported last week that rates on 30-year mortgages had fallen for a sixth consecutive week, to 5.57 percent.
Low mortgage rates helped sales of both new and existing homes to all-time highs in 2004, the fourth straight year that sales in both categories have set records.
Analysts are forecasting that housing will enjoy another good year in 2005 with sales expected to decline by around 3 percent.
For January, the strength in housing construction came in the South, where building starts rose by 18.8 percent to an annual rate of 1.14 million units. Also showing strength last month was the West, where starts rose by 1.9 percent to an annual rate of 540,000 units.