Housing Starts Fall in May, but Building Permits Jump

Builders broke ground on fewer housing projects in May, but even with the decline the level of activity was quite brisk. Total housing permits were the highest in over three decades.

The Commerce Department (search) reported that the number of residential units under way came in at a seasonally adjusted annual rate of 1.97 million last month. While that represented a 0.7 percent drop from April, the pace exceeded analysts' forecasts. They were calling for a construction rate of around 1.95 million units.

Moreover, the number of new housing projects started in April turned out to be higher than the government previously estimated. April's projects clocked in at a rate of 1.98 million units.

Total housing permits — a good barometer of current demand — rose by 3.5 percent in May to a rate of 2.01 million units, the highest level since February 1973. And permits issued for just single-family homes in May came to a record 1.59 million units.

The pair of reports issued Wednesday suggested that the recovery continues to build momentum. The economy grew at a 4.4 percent annual rate in the first three months of this year and is expected to grow solidly in the current April-to-June quarter, economists say.

With the recovery firmly rooted and the labor market improving, economists widely expect the Federal Reserve to raise interest rates for the first time in four years on June 30.

For nearly a year, the Fed has held a key short-term interest rate at 1 percent, a 46-year low. Most economists believe the Fed will boost rates by one-quarter percentage point in June. A few, however, predict a bigger half-point increase.

Federal Reserve Chairman Alan Greenspan (search), appearing on Capitol Hill Tuesday, offered an upbeat assessment of the economy and the outlook for job creation. He also held to policy-makers' current forecast that inflation should be relatively contained and thus any interest rate increases ordered by the Fed would be gradual.

If policy-makers' forecasts turn out to be wrong, the Fed will take aggressive action to keep the prices and the economy on an even keel, Greenspan said.

On the housing front, builders are slightly less confident about home sales for June as well as the next six months, according to a monthly survey by the National Association of Home Builders (search).

Mortgage rates, while still low by historical standards, have been rising in recent weeks.

Rates on a 30-year mortgage rose to 6.30 percent last week, according to Freddie Mac, the mortgage giant. Some economists are predicting this benchmark rate will climb to 6.9 percent by the final quarter of this year.

Higher mortgage rates, however, aren't expected to clip the wings of the housing markets.

"All the ingredients are in place for a healthy housing outlook," said Bobby Rayburn, president of the National Association of Home Builders and a home builder from Jackson, Miss.

Some economists are forecasting sales of previously owned homes to set a new record this year and sales of new homes will finish up close to a record high. An improved labor market should support demand for homes, they said.