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Housing boom past its peak?
October starts, permits fall more than expected in latest sign of softening real estate market.
November 17, 2005: 2:36 PM EST
By Chris Isidore, CNN/Money senior writer
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NEW YORK (CNN/Money) - The pace of home building slowed sharply in October as higher mortgage rates began to bite, a government report showed Thursday, in the latest sign that the housing boom may have peaked.

Housing starts fell to an annual rate of 2.01 million in October from a revised 2.13 million pace in September, the Commerce Department reported, while economists surveyed by had forecast a reading of 2.06 million.

While a pace of 2 million new housing projects a year is still strong, the reading was the second weakest of 2005.

Building permits, seen as a measure of how home builders view the market, sank to an annual rate of 2.07 million from 2.22 million in September, the biggest drop in six years.

The report comes on the heels of surveys of real estate agents pointing to a softening housing market and a separate survey that showed a big drop in home builders' confidence. (Watch the latest business news update on home construction and other parts of the economy -- 2:03)

Economists said that despite the recent signs of weakness, there was still some life in the real estate market. And even if the housing boom has peaked, that doesn't mean a sharp, dramatic decline in prices or sales is around the corner.

"We're still running at a very good level of activity," said David Seiders, chief economist for the National Association of Home Builders, which conducted the survey of home builders released Wednesday. "But finally we're seeing signs of a topping out and a beginning of what is hopefully an orderly cooling down period."

Seiders said he doesn't expect sharp drop in home building or new home prices going into next year, as long as there is no unexpected downturn in the economy or employment.

"I've been arguing the third quarter was probably going to be the high. That looks like a safe bet right now," he said after Thursday's report.

And another economist said the people shouldn't write off the housing market yet.

"The cries of housing market decline are ramping up again, as housing starts missed consensus," said Gina Martin, economist at Wachovia Securities. "In reality, starts have held steady above 2 million for the seventh straight month, and are quite strong in the face of rising interest rates and falling affordability."

The declines in starts and building permits were broad-based, with every region showing a drop in starts and three of four showing a decline in permits. Only the Midwest, with a small gain in permits, posted any kind of improvement.

Mortgage rates have risen steadily over the last 10 weeks, according to mortgage finance firm Freddie Mac, which now puts the average 30-year loan rate at 6.36 percent, up more than half a percentage point from early September. Higher rates tend to depress demand for housing.

In addition, prices for lumber, concrete and other building materials have jumped in the wake of Hurricane Katrina.

Seiders said the steady rise in new home prices in recent years has also helped put the brakes on building.

"The prices create their own drag on the market; you're creating affordability issues for the people who aren't in yet," he said.

The housing starts report contains no information on home prices. A separate government report last month showed that the median price for a new home fell 6 percent in September to $215,700. Half the homes sold for more than the median and half for less.

The September price was off about 9 percent from the record $237,300 median price hit in February but was still up nearly 2 percent from a year earlier.

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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