New Housing Starts Up Sharply In May

New housing construction starts were up sharply in May, spurred by low mortgage rates and a first-time homeowner tax credit widely credited for stirring interest in the slumping housing market.

New housing starts rose 17 percent in May, according to figures released this morning by the Commerce Department, the third consecutive monthly increase. Building permits for new housing construction also rose, up 4 percent over April's figures. Both figures well exceeded analyst's projections; a survey by Dow Jones Newswires had predicted increases of 7 percent and 2.5 percent, respectively.

Casting a cloud over the positive news, however, was a report yesterday from the National Association of Home Builders suggesting that home builders have grown slightly more pessimistic in June about upcoming market trends. A three-quarter point increase in mortgage rates in recent weeks appears to be the main factor in dampening builder's outlooks this month despite the strong uptick in May.

Unusually large increase in multifamily starts

New construction starts of single-family homes were up 7.5 percent in May, while construction starts of multiunit apartment buildings and condominiums of five or more units were up 77 percent following an unusually sharp decline in April. Both figures are subject to fairly large sampling error, so data for multiunit construction starts may represent a return to normal.

The sampling error on new construction permits is much smaller, however, suggesting that the 4.0 percent increase for May is pretty much on the mark. The Commerce Department cautions that four months are needed to establish a trend in any of the new construction data, meaning the three months of increases in new housing starts are approaching that mark.

Rising mortgage rates could drag down market

The future outlook for new home construction remains murky, though, as suggested by the declining optimism among homebuilders. In addition to the rise in interest rates, an anticipated increase in the number of foreclosed homes coming onto the market seems likely to put a drag on new home sales at least through the end of the year.

According to the Commerce Department figures, construction began on a seasonally adjusted total of 401,000 single-family homes in May, up from 373,000 in April. That figure still represents a 41 percent decline from one year earlier, when 679,000 single-family homes were begun in May 2008.

A total of 124,000 multiunit apartments or condominiums were begun in May, up from a reported 70,000 in April but close to the 129,000 reported in March, suggesting an anomaly in April's figures due to the large sampling error for that portion of the survey. The May figures are down 55 percent from the May 2008 estimate of 273,000 starts.

The more reliable survey of new housing permits reported that 408,000 construction permits for single-family homes were issued in May, up from 378,000 in April and down 39 percent from the 629,000 issued in May 2008. For multifamily units of five or more, 92,000 permits were issued in May, down from 102,000 in April and representing a 70 percent decline from the 314,000 issued in May 2008.