Home construction in October plunged by the biggest amount in seven months, providing dramatic evidence that rising mortgage rates are beginning to dampen the housing boom.
The Commerce Department reported that construction of new homes and apartments fell by 5.6 percent last month to a seasonally adjusted annual rate of 2.01 million units.
The decline was double what analysts had been expecting and indicated that rising mortgage rates are beginning to take a toll on housing, the economy’s star performer in recent years.
Mortgage rates were climbing in October and last week hit a two-year high of 6.36 percent for the nationwide average on 30-year mortgages.
Analysts believe that rates will climb even higher in coming months as the Federal Reserve keeps tightening credit in an effort to make sure that this year’s surge in energy prices does not spell broader inflation problems.
The October decline in housing, the biggest since a 17.7 percent drop last March, showed a slowdown in both single-family and apartment construction. Single-family homes were being built at an annual rate of 1.68 million units last month, down 4.9 percent from the September level. Construction of multifamily units fell by an even larger 13.7 percent to an annual rate of 390,000 units.
In a sign of potential weakness in the future, the number of building permits issued in October dropped by 6.7 percent to an annual rate of 2.07 million units.
The weakness in construction activity was widespread across the country, led by a 10.8 percent drop in the West, where building activity fell to a seasonally adjusted annual rate of 511,000 units.
Construction activity was down 10.5 percent in the Midwest to an annual rate of 333,000 units while construction activity fell 7.5 percent in the Northeast to an annual rate of 172,000 units.
Home construction fell 0.5 percent in the South, down to an annual rate of 998,000 units in October. Government analysts said the hurricanes that hit Gulf Coast states did not have a significant impact on building activity in the region last month.
Private analysts believe that rebuilding from the storms will boost construction but that this positive effect will not be felt for several more months.
