Construction, sales slowed by interest hikes, fuel costs

Higher interest rates and fuel costs are forcing a slowdown in residential and commercial construction and in home sales, a significant indicator of the slowing of the economy.

Recently released reports by the Census Bureau and National Association of Realtors show the Midwest as the region least affected by the trend of cooling construction and sales numbers. However, that lone stand may not last.

Despite a national downturn in construction and real estate sales, Springfield builders saw sizable increases in May. Permits issued for construction of new single family homes jumped to 42 from 33 last year. Permits for new public and industrial buildings held steady at 12, although the dollar value of the construction dropped by more than $5 million.

"There has been some slowdown market-wise," said Mike Waters, Killian Group executive vice president. "I wouldn't say a dramatic slowdown. When the percentage of remodeling goes up, it represents a slight withdrawal of confidence."

Remodeling permits for commercial buildings increased from 40 in May 1999 to 54 in May 2000. While the number of permits increased 35 percent, the estimated value of construction decreased by more than $1 million. This means more, smaller projects are being done, rather than replacing buildings.

"I think it is related to spiking energy prices," Waters said. "Everything that gets built in a building gets built on energy. Ultimately these spiking energy prices figure into your direct costs in the field."

Cord Polen, executive vice president / senior loan officer with Commerce Bank said he expects a slight slowdown, but not a very serious one.

"I think in the Midwest you don't have the major swings you have on the East and West coasts," Polen said. "Individual markets may have peaks and valleys, but the Midwest is pretty steady with no significant peaks and valleys."

In May, resales of properties nationwide rose 4.3 percent to a seasonally adjusted annual rate of 5.09 million units, the National Association of Realtors said.

NAR analysts had expected a 1 percent decline in resales to a 4.83 million unit annual rate, said Walt Molony, a public affairs specialist with NAR. Existing home sales statistics are based primarily on closings, which typically come 30 days to 60 days after the buyer signs a contract for a home.

That means sales of previously owned homes are affected more by changes in rates during the month covered by the report. May's peak in sales is because of sales negotiated in April, Molony said. "There's a lag affect that occurs from the time the interests rates rise," Molony said. "We'll probably see these upward spikes during a gradual slowdown."

Molony said the NAR changed its forecast of the overall market to 4.7 million units on annual sales, down from 4.95 million predicted in April. In May, 30-year fixed-rate mortgage rates rose to 8.64 percent, the highest in five years, according to Freddie Mac, the No. 2 buyer of U.S. mortgages.

During May 1999, the average rate was 7.15 percent. Sales of new single family homes fell 0.2 percent in May to a seasonally adjusted annual rate of 875,000 units from 877,000 units in April, the U.S. Commerce Department reported.

Privately owned housing starts in May were at a seasonally adjusted annual rate of 1,592,000, according to Commerce Department estimates. This is 3 percent below the May 1999 rate of 1,649,000.

During the first five months of this year, 671,300 housing units were started. This is virtually unchanged from the 671,600 units started in the same period in 1999, according to Census Bureau reports.

"The numbers are smaller than they were a few months ago, but they are essentially the same," said Steve Berman, Census Bureau statistician.

"The best year we ever had was 1999 at 907; the second-best year was 886. The last two months we have been averaging 795. It does look like things have dropped off, but they are still going strong."

The NAR report showed:

The median price of a home rose 0.8 percent to $137,200 in May from $136,100 in April. Home prices were the highest since August.

The supply of homes for sale, expressed in terms of the number of months over which the existing supply will last at the current sales pace, fell to 3.6 months in May from 3.8 months in April.