Construction of new housing fell a sharp 9.3 percent in September, the largest drop since May, despite continued declines in mortgage interest rates.
Starts of construction of new houses and apartments have dropped erratically this year after reaching a high in April, despite a steady decline in mortgage interest rates, puzzling economists who have expected housing starts to climb.
The pace of construction in September was the slowest since last October. Housing starts dropped from a seasonally adjusted annual rate of 1.746 million in August, to 1.583 million in September, the Commerce Department reported. Last October, the level of housing starts was at a 1.564 million annual rate.
At the same time, mortgage interest rates have fallen about 2 percentage points this year, to about 12 percent.
"Everybody was surprised housing starts went down in September," said Commerce Department chief economist Robert Ortner. "It's surprising because of the big drop in interest rates."
Ortner said that even though housing starts have not fared well, sales of new homes have begun to improve. And, he said, "I think we'll see improvement in housing starts in the next few months."
Builders could be uncertain about how the government's tax overhaul plan may affect tax breaks for the housing industry, and are holding back on building plans, Ortner said.
"We've been expecting housing starts to pick up," said David Wyss, chief financial economist for Data Resources Inc.
Wyss said sales of existing homes have been good, while those of new housing have been weak, suggesting that the real estate market had been overstocked in old homes. "Until we get rid of the existing homes stock, there's no need to build new ones," Wyss said.
Additionally, Wyss said that requests for building permits have been better than housing starts, suggesting that "a lot of people have projects on hold. That may in part reflect uncertainty on the tax overhaul bill. They will go as slowly as possible until they see which way Congress is going to jump."
Housing starts therefore could improve in the spring if a tax overhaul is agreed to by then.
Additionally, the American consumer "is in debt up to his eyeballs," Wyss said. "He is not in a position to take on a new mortgage," particularly when so many people bought new cars to take advantage of discount financing incentives offered by major American auto makers over recent weeks.
Housing also isn't as good an investment as it was in the 1960s and 1970s, when raging inflation rapidly increased the value of homes, Wyss said.
The Commerce Department said that starts of new single-family homes dropped 10.4 percent in September, to an annual rate of 962,000 units. Construction of apartments dropped 7.6 percent, to an annual rate of 621,000 units.
The issuance of building permits increased 0.7 percent last month, following a 5.3 percent rise in August. Construction starts fell 7.7 percent in the South, 6.4 percent in the Northeast, 4.9 percent in the Midwest and 16.6 percent in the West, Commerce said.