U.S. Housing Starts Fall 7.4% to Lowest in 17 Months

Builders in the U.S. broke ground on the fewest homes in 17 months in April as higher borrowing costs eroded demand, a government report showed.

Housing starts fell 7.4 percent, more than economists expected and the third straight drop, to an annual rate of 1.849 million from 1.996 million. Building permits, a sign of future construction, fell 5.4 percent to an annual rate of 1.984 million, the Commerce Department said today in Washington.

Builders including Hovnanian Enterprises Inc. are trimming sales forecasts as inventories of unsold homes swell amid higher prices and mortgage rates. Home construction, a source of strength for the economy for the past five years, will limit growth in coming months, economists said.

The decline in starts ``indicates builders are recognizing that the market is cooling,'' Nigel Gault, director of U.S. research at Global Insight Inc. in Lexington, Massachusetts, said before the report. ``By the end of the year housing construction will subtract from economic growth, perhaps quite substantially.''

Wholesale prices rose 0.9 percent in April, propelled by the biggest jump in gasoline costs in more than a year, according to a separate report today from the Labor Department. Excluding fuel and food, prices rose 0.1 percent, supporting the Federal Reserve's view that inflation is tame.

Economists expected housing starts to fall to an annual rate of 1.95 million in April from the prior month's originally reported 1.96 million, according to the median of 62 forecasts in a Bloomberg News survey. Estimates ranged from 1.88 million to 2.1 million.

Single-Family Homes

Permits were forecast to fall to a 2.04 million pace, from 2.094 million, according to the median estimate. Projections ranged from 1.995 million to 2.12 million.

Starts of single-family homes fell 5.6 percent last month to a 1.535 million-unit rate. Builders started work on multifamily homes such as townhouses at an annual rate of 314,000, a decrease of 15 percent.

Starts fell in two of four regions. They decreased 9.7 percent in the West to an annual rate of 446,000. They rose 16 percent in the Midwest to 349,000, and fell 16 percent in the South to 863,000. Starts rose 9.1 percent in the Northeast to 191,000.

The number of homes under construction fell 1.6 percent last month to a 1.388 million pace from 1.411 million. Housing completions fell 6.6 percent, the biggest decline since June 2002, to an annual rate of 2.077 million. The number of housing units authorized, but not yet started, fell 0.5 percent to 232,500.

Confidence Drops

Confidence among U.S. homebuilders dropped to the lowest level in almost 11 years this month, according to a survey released yesterday by the National Association of Home Builders.

Higher mortgage rates are cutting demand for new homes. The average rate on a 30-year mortgage rose to 6.59 percent during the week ended May 5, the highest since June 2002, according to Freddie Mac, the second-biggest purchaser of U.S. mortgages. The 30-year rate reached a record-low 5.21 percent in June 2003, and has averaged 7.49 percent since 1990.

The National Association of Realtors forecast new home sales this year will fall 12 percent to 1.134 million from a record 1.283 million last year.

Slowing sales have caused inventories to pile up. The number of new homes for sale at the end of March was a record 555,000, the Commerce Department said April 26.

Luxury Homes

Toll Brothers Inc., the largest U.S. builder of luxury houses, said fiscal second-quarter orders fell 33 percent. The Horsham, Pennsylvania-based company on May 5 lowered its 2006 sales forecast, marking the third reduction in Toll's forecast since November.

Hovnanian Enterprises Inc., New Jersey's largest homebuilder, on May 1 cut its earnings forecast for the fiscal second quarter. Earnings were hurt by production delays, a slowdown in sales, higher cancellations, price reductions and higher costs, the Red Bank, New Jersey-based company said.

``Clearly the market has slowed,'' Ara Hovnanian, chief executive officer of Hovnanian Enterprises, said in an interview the following day.

The Standard & Poor's 500 Homebuilding index, comprised of the stocks of five builders, has fallen about 21 percent this year, the third-worst performance among industry groups in the S&P 500.

Higher incomes will keep homes sales from plunging, economists said. Hourly earnings last month were up 3.8 percent from April 2005, the biggest gain since August 2001, a Labor Department repot showed last week.

``The housing market will not crash by any means but it will weaken considerably,'' Richard Curtin, director of the University of Michigan's Survey of Consumers, said in a May 12 interview. A survey by the university showed plans to buy a home fell to their lowest level since 1990 this month.

The Federal Reserve, which last week raise interest rates a 16th time in a row, predicts that a cooling housing market will help reduce economic growth to a ``sustainable'' pace.

The U.S. economy expanded January through March at an annual rate of 4.8 percent, the fastest in more than two years. Economists expect growth to a 2.9 percent pace by the end of the year, based on the median estimate in a Bloomberg survey this month.

Home Foreclosures Up as Mortgage Rates Climb

As interest rates increased steadily over the past year and the explosive growth in housing prices declined, many Americans fell behind in their mortgage payments. Now some have defaulted on home loans and could lose their homes due to foreclosures.

When home prices soared at double-digit rates during the recent red-hot housing market, many Americans stretched themselves financially to purchase a home. The use of lower-interest adjustable-rate mortgages, or ARMs, interest-only mortgages or option-ARMs that allowed home buyers to choose how to pay each month soared during the same period.

According to the Mortgage Bankers Association of America, ARMs now represent 25 percent of the more than $8.5 trillion in outstanding loans.

Economists with Moody's Economy.com forecast that the interest rates on $2 trillion of those mortgage loans could be reset in 2006 and 2007.

And that could become a problem if interest rates continue moving higher.

Today the Federal Reserve increased a key interest rate by a quarter-point for the 16th time since June 2004. The federal funds fate — which is what banks pay for overnight loans — now stands at 5 percent. Mortgage rates will not be directly affected by today's decision but tend to move in the same direction as the fed funds rate. That could soon translate into increased mortgage rates.

Homeowners who negotiated ARMs in 2004 and 2005 could face interest rate increases that boost monthly payments by as much as 50 percent. One in eight of these people is expected to default on their loans — as many as 1 million, according to First American Real Estate Solutions, which compiles national real estate data.

A Big Increase in 2006

RealtyTrac, a California organization that tracks foreclosed properties nationwide, found that the foreclosure rate in March of this year was up 63 percent compared with last year. The company's foreclosure data includes a variety of categories: homes that enter the foreclosure process, homes that are actually foreclosed on and homes that are returned to the banks.

But that doesn't mean that all of those people are left homeless. When people default on their mortgages and go to foreclosure, not all those borrowers will lose their home. Some are able to sell their homes before foreclosure. Others are able to work out a payment plan with the lender. And in many states, filing for bankruptcy will stop any foreclosures.

It's estimated that up to half of all borrowers who default on their loans will actually lose their homes to foreclosure.

Home contracts dive 29% at Toll Brothers

Toll Brothers, a leading builder of luxury homes, said Friday that its signed contracts fell 29% in its second fiscal quarter, and it cut its forecast for the number of homes it expects to sell in fiscal 2006.

For the three months ended April 30, Toll projected preliminary contracts of roughly $1.56 billion, down from $2.2 billion in the year-ago period. Backlog for the quarter rose 3% to roughly $6.07 billion.

Toll Brothers also forecast it would deliver 9,000 to 9,700 homes for the fiscal year ending Oct. 31, down 200 from its previous outlook. It was the third time since November that Toll slashed its forecast for the number of homes it expects to sell in the year.

The company, which operates in 21 states from New York to California, attributed the drop in contracts and deliveries to a greater supply of homes resulting from a drop in speculative buyers, and more cancellations from non-speculative buyers. The cancellation rate over the recent quarter was 8.5%, higher than Toll's historic average of about 7%.

"I think the Street was looking for weakness, just not this weak," said John Tomlinson, senior analyst with Majestic Research an independent research firm.

Higher home prices and mortgage rates have taken its toll on U.S. home buying, which began to soften after the summer. Since July, shares of Toll Brothers have lost 47% of their value, as its high-end customers are considered more knowledgeable about the housing market and have more discretion not to trade-up from their existing homes.

New orders, excluding ones from its joint ventures, fell to 2,167 from 3,181, while the value of the contracts declined 29% to $1.56 billion. Orders fell sharply in Toll's biggest market — the Mid-Atlantic states of Delaware, Maryland, Pennsylvania and Virginia — where they were off 45%.

"Speculative buyers are no longer fueling demand," Robert Toll, chairman and chief executive, said. "Instead they're putting the homes they've recently acquired back on the market, or are canceling contracts in mid-construction."

He said the oversupply is being "aggressively discounted by others."

Toll said revenue for the quarter ended April 30 rose 18% from a year ago to $1.44 billion. Analysts, on average, expected $1.45 billion, according to Reuters Estimates. Quarterly revenue reflects orders taken about one year ago.

The Toll forecast came after rival Hovnanian Enterprises lowered its second-quarter forecast on May 1 because of an expected 20% decline in contracts.