Housing starts remained strong, but unchanged in July, holding at 2.04 million, seasonally adjusted. The single-family sector was flat at 1.711 million, seasonally adjusted, while multi family was down 3.2 percent. Regionally, the bad weather in the South pulled starts down 5.4 percent, while the other regions showed increases. Starts in the Northeast increased 6.5 percent, Midwest starts were up 9.1 percent and starts in the West rose 2.1 percent. Permits were also up 1.6 percent, suggesting that the near term outlook for starts is good.
ANALYSIS & OUTLOOK. The housing market remains strong and is expected to remain so for the rest of 2005. Interest rates remain very attractive, although they are inching upward. The fixed rate for conforming and jumbo loans is currently at 6.02 percent.
Additionally, the market remains at lofty levels due a combination of strong demand and innovative financing, such as new mortgage products that allow buyers to have lower monthly payments in the near term. Plus, rapid price appreciation in some markets is encouraging some prospective buyers to “jump in” before rates get too high. According to a recent report by the National Association of Realtors (NAR), housing markets remain frothy in some regions. Nationally, NAR reports that prices have increased at a 13.6 percent pace, year over year – a very healthy rate that is skewed by even higher rates in some regions. For example, in the past 12 months, metro regions in Washington D.C., Miami, and New York City are up 26, 32, and 18 percent, respectively. In contrast, over the same period, slower economies in Chicago, Denver and Houston contributed to slower price appreciation rates of 7.7, 2.6, and 2.4 percent, respectively.
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Concerns remain the same as last month. The weakening dollar (which puts upward pressure on interest rates) and rapid house price appreciation (pushing prices out of reach for a growing number of potential buyers) are main concerns. In addition, higher energy prices could hurt the U.S. economy in at least two ways – higher inflation pushing up interest rates, and the “added tax” burden on consumer spending. Today, with the rapid growth and growing size of two economies – China and India – the demand for energy is outstripping supplies, and the long term prognosis for oil prices is much higher than what it would have been absent the stellar performance of these two economies. China, for example is now the world’s second largest importer of oil behind the U.S.
SUMMARY. The housing market is expected to remain strong through the rest of this year, but modest inflation and dollar problems will push mortgage rates upward through 2006 and this means the housing market is expected to pull back sometime in 2006. Single-family housing starts will probably slow the most due to affordability problems with entry level buyers as higher mortgage rates shift some prospective single-family buyers to the rental market.