Housing starts in the US fell for the first time in four months in May as interest rates rose, suggesting no early end to the recession in residential

Housing starts in the US fell for the first time in four months in May as interest rates rose, suggesting no early end to the recession in residential real estate.

Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 per cent from the prior month, the Commerce Department said yesterday. Building permits increased 3 per cent to 1.501 million.

The worst housing recession in 16 years is restraining economic growth even as inflation is too high for the comfort of Federal Reserve officials. A jump in mortgage rates and a glut of unsold properties may further reduce demand in coming months, economists said.

‘There is still some more downside to the housing market,’ said Nariman Behravesh, chief economist at Global Insight Inc in New York. ‘Mortgage rates started up again and there is still a shakeout going on in subprime.’ Mr Behravesh came closest to predicting the drop in starts among 68 economists surveyed by Bloomberg News.

The housing industry is also wrestling with soaring foreclosures among subprime borrowers - those with poor or incomplete credit histories. Lower prices and more incentives have failed to spur interest as buyers wait for bigger bargains.

Economists surveyed by Bloomberg News forecast starts would fall to a 1.472 million pace, from a previously reported 1.528 million in April, according to the median forecast of economists surveyed. Permits were forecast to rise to 1.47 million.

The average rate on a 30-year fixed rate mortgage rose to 6.74 per cent last week, the highest in almost a year, according to figures from Freddie Mac, the No2 buyer of US mortgages.

The increase reflected expectations of faster global growth and fears inflation would accelerate. The rate averaged 6.22 per cent last month and 6.18 per cent in April. Starts were down 24 per cent in the 12 months ended in May.

‘The trend down is still intact,’ said Kevin Logan, senior market economist at Dresdner Kleinwort who forecast a fall to 1.47 million units. ‘The housing contraction is going to be a drag for the rest of the year.’

Source: The Business Times, 20 June 2007