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Originally published Friday, November 18, 2005 at 12:00 AM

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Drop in housing starts tied to rising mortgage rates

Housing construction and new building permits were down sharply last month, providing fresh evidence that rising mortgage rates are beginning...

The Associated Press

WASHINGTON — Housing construction and new building permits were down sharply last month, providing fresh evidence that rising mortgage rates are beginning to cool the five-year housing boom.

The Commerce Department reported Thursday that construction of new homes and apartments fell by 5.6 percent last month, the biggest decline in seven months. Applications for new building permits, a good sign of future activity, fell by 6.7 percent, the biggest decline in six years.

Analysts said these weaker-than-expected figures, combined with evidence homes are staying on the market longer, indicate the hot real-estate market is cooling off.

"We are likely to see a steady downward trend in housing activity over the next few months all tied to rising mortgage rates," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., forecasting firm.

The fear is that home values have soared to such high levels that a slowing in demand could cause those prices to drop sharply, raising risks to recent purchasers who could end up with mortgage burdens that are higher than the falling values of their homes.

Behravesh doesn't see that happening, saying higher mortgage rates "should serve to cool the market down without precipitating any kind of nasty scenario."

The National Association of Realtors reported Tuesday that 69 cities around the country saw double-digit price gains during the July-September quarter, compared with the same period a year ago, led by a 55.2 percent surge in the Phoenix area and a 44.8 percent jump in home prices in Fort Myers, Fla.

Nationally, median prices for existing homes were up 14.7 percent in the third quarter compared with a year ago.

Analysts said as sales slow, double-digit price increases are likely to be a thing of the past as the Federal Reserve keeps pushing interest rates higher to combat inflation pressures.

Freddie Mac reported Thursday that the 30-year mortgage rose to 6.37 percent this week, the highest level in more than two years and well above this year's low of 5.53 percent set in June.

In addition to the big drop in construction starts in October, the National Association of Home Builders said a new survey showed builder optimism fell in November by the largest amount since right after the Sept. 11, 2001, terrorist attacks.

David Seiders, chief economist for the homebuilders, said he thinks sales of both new and existing homes, while still setting records for a fifth consecutive year in 2005, will be down by around 5 percent next year, representing "an orderly simmering down process."


But he cautioned that there were risks that the drop-off in activity could be more severe. He said one of the biggest risks is if housing purchased by speculators starts being dumped on the market, causing a glut that will sharply depress prices.

The October decline in housing, which pushed the total to a seasonally adjusted annual rate of 2.01 million units, reflected a 3.7 percent drop in single-family building and an even bigger 11.7 percent decline in multifamily construction.

By region, construction starts were down 10.8 percent in the West, 10.5 percent in the Midwest, 7.5 percent in the Northeast and 0.5 percent in the South.

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