Housing Starts Decline 3.2% During March : Factory Operating Rate Down; Inventories Up

WASHINGTON — Housing starts fell 3.2% in March, the biggest decline in six months, the Commerce Department reported Thursday, as sharp increases in mortgage rates in recent weeks continued to send shivers through the housing industry.

The department said new homes and apartments were being constructed at a seasonally adjusted annual rate of 1.77 million units in March, down from a revised February rate of 1.83 million units.

It was the first decline in housing starts since November and the biggest setback since a 6.2% drop last September.

In other economic news Thursday, the Federal Reserve Board reported that American factories, mines and utilities operated at just 79.2% of capacity in March, down 0.5 percentage point from the February level.

Signs of Weakening Economy

The March declines were widespread across manufacturing and mining industries.

Analysts said the dip in housing starts and the big slide in factory operating levels were further indications that the economy weakened in March.

In a third report, the Commerce Department said business inventories edged up in February by 0.2%, following a huge 1% rise in January. February’s inventories on shelves and in back lots rose to a seasonally adjusted $660.19 billion.

Analysts believe that the rise in inventories will boost economic growth in the January-March quarter but cut into activity in the spring quarter.

Housing construction had risen a healthy 10.6% in December and then held steady with smaller gains of 0.2% in January and 0.9% in February as falling mortgage rates raised expectations for another strong year for builders.

However, mortgage rates, after declining for most of a year, jumped sharply in the past two weeks, carried higher by fears in the financial markets over rising inflation and the falling dollar.

Analysts said the downturn in housing starts in March, which occurred before interest rates began to rise, could deepen if mortgage rates don’t moderate.

Effect of Mortgage Rates

“Higher rates could slam the brakes on housing starts in the months ahead,” said Warren Lasko, executive vice president of the Mortgage Bankers Assn. “Higher interest rates mean that fewer people will be able to afford housing, and we will end up with a weaker year than we had hoped for.”

The upward spurt in rates may actually act to spur sales in the early spring as people who had been waiting for rates to go lower realize they had better buy quickly before rates rise even further, analysts said.

But for the whole year, Lasko said it was now likely that housing construction will total only 1.6 million to 1.65 million units, down as much as 12% from last year.

“The outlook for the balance of the year in housing is not as rosy because of the turmoil in the financial markets,” said David Seiders, chief economist for the National Assn. of Home Builders. “There is so much skittishness in the markets related to what the dollar is doing and what that will mean for inflation and interest rates.”

The weakness in housing starts last month came in both the single-family and apartment sectors.

Construction of single-family homes fell 4.2%.