U.S. Housing Starts Rose 4.7% in January to 2.159 Million Pace

Feb. 16 (Bloomberg) -- U.S. housing starts unexpectedly rose to a 21-year high in January, paced by record construction of single-family homes, the Commerce Department said today in Washington.

The 4.7 percent increase in new construction to 2.159 million housing units at an annual rate followed a revised gain of 14.3 percent the month before. The median forecast of 66 economists surveyed by Bloomberg News called for a decline to 1.925 million. Today's number exceeded every estimate.

Payroll growth and mortgage rates that averaged less than 6 percent last year fueled demand. Rates fell in January, giving a further boost to construction.

"The housing industry remains quite strong," Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis, said before the report.

Building permits, an indicator of future construction, also surged, rising 1.7 percent to an annual rate of 2.105 million, the highest since May. January was the seventh month in which permits exceeded 2 million.

Starts of single-family homes rose 2.7 percent to 1.76 million, the highest ever, from 1.71 million a month earlier. Starts of townhouses, apartments and other multifamily dwellings rose 14 percent to 399,000 thousand units at an annual rate.

New construction rose in two regions, the South and West. In the South, starts rose 18.8 percent to 1.139 million at an annual rate. Starts rose 1.9 percent in the West to 540,000. Starts fell 24 percent in the Northeast to 150,000 and 12.5 percent in the Midwest to 330,000.

Completions Fall

The number of homes authorized but not yet started fell 4.8 percent in January to 204,100. Houses already under construction last month rose 1.3 percent to 1.296 million at an annual rate.

Housing completions fell 0.8 percent to a 1.915 million rate. Single-family completions fell 3.7 percent to 1.599 million.

The average rate on a 30-year fixed mortgage fell to 5.71 percent in January from 5.75 percent in December, and averaged 5.84 percent for all of last year. Those remain within a percentage point of the record low 5.21 percent in June 2003, according to figures from Freddie Mac, a government-chartered provider of mortgage financing.

"These mortgage rates mean the first six months of the year won't be so bad for housing," said Anthony Chan, senior economist at JPMorgan Fleming Asset Management in Columbus, Ohio. "It's not a permanent situation though. Housing is going to slow down in the second half of the year."

Jobs and Housing

The National Association of Realtors and the Mortgage Bankers Association share Chan's expectation of a slowing housing market. The real-estate association forecast earlier this month that sales of existing homes will slow to 6.54 million from 6.68 million, sales of new homes will slow to 1.11 million from 1.18 million and housing starts will slow to 1.92 million from last year's 1.95 million, which were the most since 1978.

Total home sales would still be the second highest on record.

Continued job growth will be more important to the market than interest rates, which the Mortgage Bankers Association forecasts will rise to between 6.25 percent and 6.5 percent by the end of the year as rate increases by the Federal Reserve work their way into mortgages.

"In the long run jobs are the key," said Douglas Duncan, chief economist at the mortgage bankers group. "People who don't have a job are not a very good candidate to buy a home."

Monthly job growth this year may average 174,000, according to a survey of economists published Feb. 14 by the Federal Reserve Bank of Philadelphia. That's down from a previous forecast of 181,000, which was also the average for all of 2004.

Job growth averaged 137,000 a month in November through January, compared with 200,000 in the prior three months.

Best of Two Worlds

Chan says 125,000 new jobs are needed each month to absorb increases in the working-age population.

"We've got the best of both worlds right world right now," Donald Tomnitz, chief executive officer of D.R. Horton Inc., said before the report. "There are jobs being created, incomes are up, unemployment is down and mortgage rates have dropped."

D.R. Horton is the largest U.S. homebuilder by market value. Tomnitz said the Fort Worth, Texas, company expects to deliver 50,000 homes this year, compared with a record 43,567 last year.

Smith Barney analyst Stephen Kim says the homebuilding industry is poised for a fall. Homebuilders' "earnings growth should moderate," he said Feb. 10 in a note to clients.

John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, sees the housing industry creating its own problems as mortgage lenders struggle to meet sales targets elevated by past record years.

"We just don't have the same pent-up demand for housing anymore," Silvia said before the report. "As a result, lenders are turning to less-qualified borrowers to hit their revenue targets. In the short run, you hit your targets, but over the next two or three years delinquency rates are going to go up."