WASHINGTON – New home construction unexpectedly increased in November at the fastest pace in seven months in what could be a final flourish for the nation’s 5-year-old housing boom.
The Commerce Department reported that construction activity rose by 5.3 percent in November from the October pace, when housing construction had fallen by 6.6 percent.
Analysts were taken by surprise by the size of the rebound, which pushed construction of homes and apartments to a seasonally adjusted annual rate of 2.123 million units. They had been forecasting a more modest 0.3 percent rise.
However, they said the November performance does not change their view that housing is peaking and will move to lower levels next year under the impact of rising mortgage rates.
Rates on 30-year mortgages are now at 6.30 percent, up from 5.68 percent a year ago, and the forecast is that they will climb higher as the Federal Reserve keeps boosting interest rates to keep inflation under control.
A second report on Tuesday indicated that wholesale inflation moderated in November with wholesale prices declining by 0.7 percent. It was the biggest drop in 21/2 years and was led by big declines in gasoline and other energy prices.
Analysts, however, said they expected inflation pressures to return in coming months with homeowners facing winter heating bills that will be significantly higher than a year ago.
The big question in housing is whether a slowdown in sales, which have set records for both new and existing homes for the past five years, will be a moderate drop or something severe enough to send home prices plunging.
Nariman Behravesh, chief economist at Global Insight of Lexington, Mass., said he believed the sales slowdown would be enough to hold home price increases to around 2 percent to 3 percent next year, compared with recent double-digit price increases.
“Our view is that housing is set to slow down, but it will be a fairly benign slowdown,” he said.
Those worried about a bigger drop fear that investors who purchased homes during the boom times in hopes of turning a quick profit will create a glut of homes on the market as they try to dump investments that are no longer appreciating as quickly in price.
There is also a concern that rising mortgage rates and moderating prices could cause trouble for homeowners who used one of the new exotic mortgage instruments, such as interest-only loans, to buy more home than they could normally afford.
The Federal Reserve and other federal banking regulators put out for public comment on Tuesday new guidance for banks making loans using nontraditional mortgage products.
The regulators said in a joint statement that banks must “recognize that certain nontraditional mortgage loans are untested in a stressed environment” and therefore banks must monitor those loans more closely and also consider setting aside bigger loan loss reserves.
The 5.3 percent increase in construction activity in November was the biggest one-month advance since a 10.6 percent gain last April. It reflected a 4.8 percent increase in single-family construction and a 7.9 percent rebound in multifamily construction.
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