Housing Starts Rise in July but Fall Short of Forecasts

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By Lucia Mutikani

WASHINGTON -- U.S. housing starts and permits for future home construction rose less than expected in July, suggesting that higher mortgage rates could be slowing the housing market's momentum.

The Commerce Department said Friday that housing starts increased 5.9 percent to a seasonally adjusted annual rate of 896,000 units. June's starts were revised up to show a 846,000-unit pace instead of the previously reported 836,000 units.

Economists polled by Reuters had expected groundbreaking to rise to a 900,000-unit rate last month. Permits to build homes rose 2.7 percent in July to a 943,000-unit pace. Economists had expected permits to rise to a 945,000-unit pace.

"It's not a surprise given the recent rise in mortgage rates. I think we are looking at a situation that some air is coming out of the housing recovery given the higher mortgage rates," said Michael Hanson, senior economist with Bank of America Merrill Lynch in New York.

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"At this point, affordability hasn't changed that much on a historical basis. Housing affordability remains high, but fundamentals are less favorable for new buyers than they were a couple of months ago," Hanson said.

Mortgage rates have spiked in anticipation of the Federal Reserve tapering the $85 billion in bond purchases it is making monthly to keep interest rates low and stimulate the economy.

Economists expect the U.S. central bank to make an announcement on tapering at its policy meeting next month. U.S. stocks were poised to open slightly higher after the data. The dollar pared gains against the yen and fell to a session low against the euro.

The residential construction figures last month could also be a reflection of supply constraints. Builders have been complaining about a shortage of labor and materials. Still, residential construction remains on a firmer footing and should again contribute to economic growth this year.

A report on Thursday showed confidence among single-family homebuilders neared an eight-year high in August, with builders fairly upbeat about sales prospects over the next six months.

Though residential construction only accounts for about 3.1 percent of gross domestic product, housing has a wider reach in the economy. Analysts estimate that for every single-family home built, at least three jobs lasting for a year are created.

Economists expect average monthly housing starts for the whole of 2013 to top 1 million.

Last month, groundbreaking for single-family homes, the largest segment of the housing market, fell 2.2 percent to a 591,000-unit pace, the lowest level since November last year. Starts for multifamily homes jumped 26 percent to a 305,000-unit rate, reversing the prior month's decline. Permits for multifamily homes rose 12.6 percent to a 330,000-unit rate. Permits for single-family homes fell 1.9 percent to a 613,000-unit pace.

A separate report from the Labor Department showed nonfarm productivity increased at an annual rate of 0.9 percent in the second quarter.

Productivity dropped at a rate of 1.7 percent in the first quarter. Unit labor costs -- a gauge of labor-related costs for any given unit of output -- rose at a rate of 1.4 percent in the second quarter after dropping in the first quarter at a rate of 4.2 percent.