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NEW YORK (CNN/Money) -
The pace of home building slowed a bit in August, the government said Tuesday, though the housing market remained strong leading up to Hurricane Katrina.
But economists said that the latest numbers show some of the peril to builders and new home buyers nationwide from the storm, which has already sparked a big jump in prices for many building materials.
The Census Bureau said housing starts fell to a 2.01 million annual pace last month from the 2.04 million rate in July. Economists surveyed by Briefing.com had forecast that starts would slip to an annual rate of 2.03 million.
Starts for single-family homes actually stayed relatively flat at a 1.71 million pace. It was apartment buildings with five or more units that saw a sharp 12 percent drop to an annual starts of 256,000. That type of building is down just over 30 percent from the levels seen in January.
Building permits, seen as a measure of builders' confidence in future demand for new homes, slipped to an annual pace of 2.12 million from 2.17 million in July. Economists' forecast had been for a 2.13 million rate.
The data was collected before Hurricane Katrina hit the Gulf Coast at the end of August.
Even before the storm, the South, which has been responsible for nearly half of the nation's single-family home starts in recent years, saw single family home starts slip about 4 percent in August. But the West posted a double-digit rise in total housing starts and single-family homes compared to July.
Even with the slowing in home building, the report showed historically strong demand. Permits are the fifth-best month on record.
"We must remembers any seasonally adjusted annual rate above 2 million is, historically, an incredibly strong number," Wachovia Securities economic analyst Phillip Neuhart wrote in a note to clients. "With such healthy permit issuance, the coming months should continue to see resilient housing starts."
Nationwide building will feel Katrina effect
But the impact of Katrina on housing is still to be determined.
In the short run, prices for plywood and other lumber products have soared 50 percent or more since the storm hit Aug. 29.
Dave Seiders, chief economist with the National Association of Home Builders, said the price increases for materials could cost add about $10,000 to the cost of a 2,400-square foot, 4-bedroom, 2-bath home. He said some of that will have to be swallowed by home builders, and some may be passed onto buyers.
"Some of it is panic buying," he said about the price increases. "Certainly there is more demand than there was before the storm. But the building materials markets already were pretty taut before the storm" due to strong activity.
Even if material prices retreat to an average of $5,000 more per house, that's more than a $10 billion in additional home building costs across the country due to the storm. And that doesn't even consider any possible increase in labor costs if contractors and subcontractors head to the Gulf Coast region when rebuilding gets underway, creating shortages of skilled craftsmen elsewhere.
The price increases could put the brakes on new building going forward, according to Seiders.
"We've been getting reports from the field about buyer resistance to house prices, even before the storm," he said.
Still, Seiders said that the demand to replace homes in the Gulf Coast area will probably lead to a pickup in building next year, even if price increases slow building elsewhere.
Neuhart said an estimated 250,000 homes were destroyed by the storm. But Seiders said it's not realistic to expect all those homes to be replaced in the next year or two. He's only raised his estimate of new home starts by 25,000 for 2006 so far due to Katrina.
"Short term what you'll see is an drop in vacancy rates for rental properties," he said. "That rebuilding process will stretch out over a good number of years. It always does in wake of a major hurricane."
Rising mortgage rates may have helped put the brakes on building in August, as the average 30-year fixed-rate mortgage increased about an eighth of a percentage point for the second straight month in August to 5.8 percent, according to a survey by mortgage financing firm Freddie Mac. But mortgage rates have dipped in September, according to the firm's weekly survey.
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