Bloomberg News

WASHINGTON - U.S. new home construction fell in June to the lowest level in more than two years as higher mortgage rates discouraged buyers, government figures showed.

Housing starts dropped a larger-than-expected 2.6% last month to a seasonally adjusted annual rate of 1.554 million units after declining to a revised 1.596 million units in May, the Commerce Department said. June's level was the lowest since 1.536 million units at an annual rate in May of 1998.

Home construction accelerated last year and peaked in February, when builders broke ground on new homes at the fastest pace in more than 13 years. Today's number puts housing starts on track to finish the year at 1.654 million units, compared with 1.667 million last year, which also was the highest annual number in 13 years.

"Mortgage rates hit their peak in May, so it's no surprise to see that housing starts took a beating," said Paul Christopher, an economist at A.G. Edwards & Sons in St. Louis. "The slowdown is for real, and it's going to continue."

Borrowing costs have risen since the beginning of the year, with the rate on a 1-year adjustable mortgage up by more than half a percentage point between the end of February and the start of June.

Analysts expected starts to decline 1.1% to 1.574 million units at a seasonally adjusted annual rate. New home construction had recently peaked at an annual pace of 1.822 million units in February, the fastest since 1.833 million in December 1986.

Starts of single-family homes fell 3.2% in June to a 1.214 million seasonally adjusted annual rate, the lowest level since 1.212 million in May 1998. June starts of multi-family homes fell 0.6% to a 340,000 annual rate, following no change in the previous month.

Building permits, an indicator of future construction, were unchanged at 1.511 million units at an annual rate after falling 3.1% in May. The June level was the lowest since 1.456 million in December 1997.

By region, starts fell in the West, Midwest and Northeast while rising in the South.

The average rate on a 30-year fixed-rate mortgage was 8.23% in June, compared with 7.61% a year earlier, according to Freddie Mac, the No. 2 buyer of U.S. mortgages. The average rate on the popular 1-year adjustable mortgages climbed from 6.73% at the end of February to a nine-year high of 7.27% early this month.

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