Housing Holding Up Even as Growth Slows

Interest rates are still low enough to bolster home construction even as soaring fuel costs after Hurricane Katrina slow the rest of the economy, economists said in advance of reports this week.

Builders probably broke ground on 2.028 million homes at an annual rate last month, keeping construction on pace to surpass last year's total as the highest since 1978, according to the median forecast in a Bloomberg News survey before a Sept. 20 Commerce Department report. The index of leading economic indicators dropped for the first time in five months in August, signaling a moderation in growth is at hand, economists said.

Prices for crude oil, gasoline and natural gas all reached records after Katrina damaged Gulf Coast production platforms, refineries and pipelines. With fuel costs threatening to speed inflation, most economists predict Federal Reserve policy makers will boost their target interest rate this week to 3.75 percent.

``It's the heightened risks posed by energy prices that will likely be Katrina's legacy for the Fed,'' said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto. ``With housing markets still frothy and risks that energy prices could still fuel higher core inflation, we judge the Fed would be more comfortable pausing'' once the rate gets to at least 4 percent, he said.

Central bankers will boost the target rate for overnight loans between banks, currently at 3.5 percent, when they meet in two days, according to the median forecast. It would be the 11th straight increase of a quarter percentage point since June 2004.

Policy makers will raise the rate again in November, taking it to 4 percent, before pausing during this year's final meeting in December, according to Gregory's forecast.

Housing Starts

The number of housing starts expected last month would follow a 2.042 million pace in July and be the fifth straight month in excess of 2 million. The 1.953 million homes started in 2004 were most since 1978.

The Sept. 20 report on home construction is also expected to show that permits, considered an indicator of future building, dropped to a 2.137 million annual pace from a 32-year high of 2.171 million in July, based on the median forecast.

The increases in short-term interest rates engineered by the Fed haven't affected long-term mortgage rates. The rate on a 30- year fixed mortgage averaged 5.82 percent last month compared with an average 6.29 percent in June 2004 when the Fed first raised its target rate, according to figures from Freddie Mac, the No. 2 buyer of U.S. mortgages.

Mortgage Rates

``We still have very low mortgage rates,'' said Angelo Mozilo, chief executive of Countrywide Financial Group, the biggest U.S. mortgage lender, in an interview Sept. 13. ``Supply is still behind demand in most areas of the country. Overall, it's still a very healthy housing market.''

Sales of new homes reached a record 1.41 million annual pace in July, the Commerce Department said last month.

While cheap mortgage rates are still bolstering housing, record fuel prices are souring consumer sentiment and raising concern that Americans may curtail spending.

The University of Michigan's preliminary index of consumer sentiment fell this month to the lowest in 13 years, a report last week showed. It was the sharpest drop since December 1980. The university's measure of consumers' views on the economy's future slumped 13.3 points this month on top of a 8.6-point drop in August as fuel prices soared even before Katrina formed.

Leading Indicators

The index of leading economic indicators due from the New York-based Conference Board on Sept. 22 probably fell 0.3 percent in August, according to the survey median. The decline may be led by the drop in consumer expectations, one of 10 components of the leading index. The leading indicators, which the research group designed to signal how the economy will perform in the next three to six months, last dropped in March.

Another component that already suggests the leading index will decline again this month is the number of first-time claims for jobless benefits. Applications probably soared last week to 455,000, the most in three years, as people thrown out of work by Katrina file, according to the survey median. Claims totaled 398,000 the prior week, 68,000 of which were attributed to workers affected by the hurricane.

The hurricane may cost the economy 400,000 jobs and a percentage point of lost growth in the second half of the year, according to the latest estimate by the Congressional Budget Office.

``Things were really moving along very nicely'' before Katrina struck,'' said Paul Sarvadi, chief executive of Administaff Inc., a Kingwood, Texas-based provider of personnel services, in a Sept. 13 interview. ``The thing we have to be concerned about, of course, is the way that gasoline prices have spiked, and hopefully that won't stay there forever. But we are yet to see the real economic impact there.''