Housing Starts Tumble in June

Tue Jul 20

By Mark Felsenthal

WASHINGTON (Reuters) - U.S. housing starts unexpectedly plunged 8.5 percent in June to their lowest level in more than a year as rising interest rates cooled the hot housing market, a government report showed on Tuesday.

Permits, a sign of builder confidence in future demand, fell to their lowest level since February, posting the biggest monthly decline in more than 10 years, the Commerce Department said.

The housing market decline is to be expected after months of strong performance, Federal Reserve Chairman Alan Greenspan told Congress.

"The number is weak, there's no question about that, and definitely below where our expectations are, but we do not believe it's a cause for concern," he said in testimony before the Senate Banking Committee.

Housing starts have grown at "an extraordinary pace" in recent years but are likely to ease lower, although not drop off abruptly, over the next few years, he added.

In separate reports, chain store sales inched up last week, but cool weather and slow demand for summer goods continued to cut into business.

The unexpected slip in housing starts comes after June data for retail sales, industrial production and payrolls were either down or weaker than anticipated.

But Greenspan said that although the U.S. economy had hit a soft spot in recent months after inflation picked up, it has made a good start to the third quarter and is gaining momentum.

"There is no real underlying evidence of any cumulative weakness here," he said.

Markets had little reaction to the economic reports, although home builders' stocks fell. But broad measures of stocks rose, bonds fell and the dollar climbed against major currencies on Greenspan's comments, which were interpreted as moderately upbeat and as signaling a quicker rise in interest rates than anticipated.

The Dow Jones industrial average (^DJI - news) rose 55.01 points, or 0.5 percent, to 10,149.07, while the Dow Jones Home Construction index (^DJUSHB - news) dipped 0.8 percent.

As Greenspan completed his question-and-answer session, the benchmark 10-year note had lost 22/32 in price, lifting its yield to 4.45 percent from 4.36 percent late on Monday but still a long way from the 4.88 percent high seen just last month.

BUILDING PERMITS OFF SHARPLY

Homebuilders broke ground at a seasonally adjusted annual rate of 1.802 million units last month, down from an upwardly revised 1.970 million the previous month. It was the biggest drop since a 10.7 percent tumble in February 2003.

Analysts had been expecting starts to edge up to 1.99 million units.

Permits to break new ground dropped more than expected by 8.2 percent to a 1.924-million-unit rate from a 2.097-million pace in May, the heftiest decline since an 8.7 percent loss in February 1994. Wall Street had expected 2.02 million units to be authorized.

Single-family starts fell 9.5 percent to 1.489 million units from 1.645 million the month before, the lowest level since May 2003 and the biggest drop since February of last year.

Mortgage interest rates fell to near historic lows at the beginning of 2004, fueling strong demand for homes. But with the U.S. economic recovery gaining strength, interest rates crept higher in the last two months, making homes more expensive and dulling appetite among buyers.

The rate on a 30-year fixed rate mortgage rose to 6.32 percent in mid-June, but had fallen to 6.00 percent by last week.

CHAIN STORE SALES RISE

Chain store sales rose 0.2 percent last week, up slightly from the flat reading in the previous week, the International Council of Shopping Centers and UBS said in a joint report.

Compared with the same week a year ago, sales increased 3.3 percent, slowing from the 3.4 percent growth pace of the preceding week. Year-over-year sales have slowed for two consecutive weeks. However, optimism remained high on hopes for a pickup in demand.

"The early indication is that back-to-school demand is looking promising and the upcoming round of state sales tax holidays will help to spur customer traffic over the upcoming month," Michael Niemira, ICSC's chief economist and director of research, said in a statement.

A second retail report showed sales at U.S. chain stores rose, though at a slower pace than the previous week, as retailers began clearing out seasonal items.

Sales at major retailers increased 2.6 percent on a year-over-year basis last week, compared with the preceding week's 2.8 percent pace, said Redbook Research, an independent company. Sales in July so far were down 0.6 percent compared with June. (Additional reporting by Alister Bull in Washington and Kevin Plumberg, Elizabeth Lazarowitz, Pedro Nicolaci da Costa, and Manuela Badawi in New York)

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