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Housing starts stay strong post-Katrina
Unexpected rise in building activity shows 'no evidence' of a downturn, a housing market bear says.
October 19, 2005: 2:00 PM EDT
By Chris Isidore, CNN/Money senior writer

NEW YORK (CNN/Money) - Hurricane Katrina and higher prices for construction materials could not put a dent in the white-hot home building market, according to a government report Wednesday, the first broad look at the national real estate market since the storm.

Housing starts rose 3.4 percent to an annual rate of 2.11 million in September, the third-best month on record, the Census Bureau reported. That's an unexpected increase from the 2.04 million annual pace in August, which was also revised higher.

Economists surveyed by had forecast the annual rate would slip to 1.98 million.

The only two months with a faster pace of housing starts were January and February of this year, according to the government report. Starts jumped about 10 percent from year-earlier levels.

Building permits, generally seen as a reading of home builders' confidence in the market, also rose unexpectedly, to an annual rate of 2.19 million from 2.14 million in August. Economists had forecast a decline to a rate of 2.08 million.

The South saw the best gains in housing starts, up more than 6 percent.

But the Census Bureau said it believes the impact of Hurricane Katrina on the regional and the national numbers was minimal. And while more than 45 percent of the nation's home building takes place in the South, the region directly hit by Katrina is a relatively small part of the South's building boom.

No signs of weakness

Even an economist who is one of the leading advocates of the real estate "bubble" theory said the most recent report shows no sign of weakness.

"It's clearly very strong across the board. There's no evidence of any downturn at this point," said Dean Baker, co-founder of the Center for Economic and Policy Research.

But Baker said that housing starts and permits, while a leading indicator of real estate market strength, are probably not where any weakness in the real estate market will first be seen.

"I've always thought you'll have the movement in price before you'll see it on quantity side," said Baker. "As long as the price remains high, if you're a builder, you want to get the houses up in order to cash in."

Wednesday's Census Bureau report does not contain any information on housing prices.

Dave Seiders, chief economist for the National Association of Home Builders, said even he was surprised by the strength of starts and permits. The group's own survey of builders in early September and again in early October have shown some signs of slowing construction not seen in the government report.

"I didn't expect to see the numbers deteriorate because of the effect of Hurricane Katrina. But I expected to see a retreat because some other signals have been suggesting either a flattening of the market or a slight decline," he said.

Builders are also telling the trade group they're starting to run into some resistance from buyers for higher prices due to increases in material and land costs.

"A large percentage are offering sales incentives to keep things going, a free amenity, or paying closing costs," Seiders said.

But Seiders said as good as numbers have been, he remains concerned that the very strong housing starts and permit numbers could lead to oversupply if the market does show significant softening.

"Some people are probably going to argue that the builders might be a little over exuberant here," he said. "While I view it (the housing starts report) as a good news, I have a little concern as to whether the builders are tracking the demand side accurately. Hopefully they are."

Storm impact tough to gauge

Seiders said he believes the real impact Katrina on building will be seen in the time it takes to complete building due to shortages of some materials, not in the housing starts or permit numbers.

Some materials, including plywood and other wood panels, as well as concrete, have seen price increases and shortages due to a combination of demand from the hurricane-affected region and supply chain disruptions caused by the storm.

"I would expect builder profit margins will be affected by the hurricane," he said. "But margins were very healthy going into this."

Regarding Katrina's impact on the government numbers, a home that is completely rebuilt due to storm damage will be counted as new construction, though it was not immediately clear how many of those were included in this report.

Manufactured houses moved into the region to house those displaced by the storm are not counted as housing starts, the bureau said.

The Northeast and the West both saw little change in housing starts in September. The West actually saw a 5 percent drop in single-family home starts, with multi-family home gains allowing building to remain level.

Meanwhile, the South saw a 3 percent drop in home building permits, although local governments that couldn't be contacted by the bureau due to the storm were assumed to have issued no building permits during the month.

The other three regions all saw gains in permits, with permits for new homes in the West up more than 11 percent.

Building could have gotten a lift from a slight drop in mortgage rates following Hurricane Katrina.

The survey by mortgage financing firm Freddie Mac put the average 30-year mortgage rate at 5.77 percent in September, down from 5.82 in August. But the average mortgage rate has since risen above 6 percent in the most recent weekly survey.


For a look at the impact of Hurricane Katrina on home building costs, click here.

For more on the real estate market and what it means to you and your investments, click here.  Top of page

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