Construction of new homes and apartments fell to the weakest pace in 17 years in August, far more than expected, but lower mortgage rates and tax credits have given builders some glimmer of hope of a possible rebound.
Housing construction dropped a surprising 6.2 percent last month, the Commerce Department reported Wednesday, far larger than the 1.6 percent decline analysts had been expecting.
It was the slowest building pace since January 1991, but that should help clear out bloated inventories of unsold homes. Building activity is on track to slide below the 1 million mark for the whole year, the first time that has happened in more than six decades.
“The housing market is just cratering – sales, prices and construction are all down. That is the fundamental reason why the economy is having so much trouble,” said Mark Zandi, chief economist at Moody's Economy.com.
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Supporting the view that construction will fall further, building permits, considered a good indicator of future activity, dropped 8.9 percent in August to an annual rate of 854,000 units.
But Zandi said he believed the low point could soon be reached, at least in terms of construction and sales, although he said that prices will likely keep falling until next spring.
Part of the reason for optimism is the dramatic fall in mortgage rates that has occurred since the government moved to seize control over mortgage giants Fannie Mae and Freddie Mac.
The average interest rate on a 30-year mortgage was 6.14 percent on Wednesday, up from 6.02 last week, but still below 6.65 percent a month ago, according to HSH Associates.
Economists said the lower mortgage rates should help provide a floor for home sales, keeping them from falling further.
Builders surveyed this month said they expected business conditions to improve slightly over the next six months, the National Association of Home Builders reported Tuesday.
The trade group's index of builder sentiment posted the first increase in seven months in September, edging up to 18, off the record low of 16 set the previous two months.
David Seiders, chief economist for the NAHB, said builders are also optimistic that the new tax credit for first-time home buyers – included in the recently passed housing bill – will help bolster sales.
“Builders are doing their part by cutting back on production to limit supply,” Seiders said. “The key will be getting the demand side going.”
The two-year housing downturn has pushed the country close to a recession, sent mortgage foreclosures to record highs and is now leveling some of the biggest names in finance because of soaring losses on their mortgage investments.