Commerce Department Findings Further Evidence That Housing Market is Cooling

Housing construction and building permits fell significantly in October, providing additional evidence that rising mortgage rates are beginning to cool the U.S. housing boom of the past five years. Analysts said the following weaker-than-expected figures, combined with the fact that homes are consistently staying on the market longer, indicate that real estate markets are cooling down:

• The U.S. Department of Commerce reported Thursday that construction of new homes and apartments fell by 5.6 percent last month, the biggest such drop in seven months.
• Applications for new building permits, considered an accurate sign of future activity, fell by 6.7 percent — the sharpest decline in six years.

Experts agree that the U.S. is likely to see a steady downward trend in housing activity over the next few months, as a result of the rising home mortgage rates, which recently soared higher than any point in the previous two years. Freddie Mac reports that the 30-year fixed-rate mortgage loan rate rose to 6.37 percent on average this week, well above the 5.53 percent rate as recently as June.

The fear is that home values have soared so much that a reduction in demand could cause those prices to drop drastically - heightening the risk to recent buyers, who could end up with mortgage burdens grater than their homes’ values. The hope is that rising mortgage rates will cool the market gradually, leveling the field without any major negative ramifications for recent purchasers.

The National Association of Realtors reported this week that 69 cities around the country saw double-digit price gains during the July-September quarter of 2005, compared with the same period a year ago, with two of the top three markets consisting of Florida real estate. Median prices for existing homes nationally were up 14.7 percent in the third quarter compared with a year ago. Analysts say as sales slow and the Federal Reserve keeps pushing interest rates higher to combat inflation pressures, double-digit sales will soon be no more.

In addition to the big drop in October construction, the National Association of Home Builders said builder optimism fell in November by the largest amount since immediately following the Sept. 11, 2001 terrorist attacks. An economist for the group believes sales of both new and existing homes (which will still set a record for the fifth consecutive year in 2005) will be down by a modest 5 percent next year. The builders are concerned, however, that inordinate amounts of housing purchased by speculators will be dumped on the market and sharply depress prices.

The October housing decline reflected a 3.7 percent drop in single-family building and an even bigger 11.7 percent decline in multifamily construction. By region, construction was 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.