Bloomberg News

WASHINGTON - U.S. housing starts fell in May to the lowest level in a year as the effects of higher mortgage rates started to reduce demand for new homes, government figures showed Friday.

Housing starts fell 3.9% last month, to a seasonally adjusted annual rate of 1.592 million units, after rising 1.6%, to 1.656 million units in April, the Commerce Department said.

"Higher mortgage rates continued to crimp housing activity," said Steve Wood, an economist at Banc of America Securities in San Francisco. In the past year "starts have dropped nearly 3.5%, and there are likely further declines on the horizon."

U.S. Treasury security prices and stock index futures rose after the report, which added to other recent evidence that the economy is cooling enough to persuade Federal Reserve policymakers to refrain from raising interest rates this month.

Home construction has been declining since the annual rate reached 1.822 million units in February. May's level is the lowest since an annual pace of 1.562 million units in June 1999.

Analysts had expected a 2.6% decline last month, to an annual rate of 1.620 million units from April's previously reported annual rate of 1.663 million units.

Starts of single-family homes fell 5.4% in May, to a 1.25 million-unit, seasonally adjusted annual rate, the lowest since 1.248 million in April 1999. May starts of multifamily housing rose 2.1%, to a 342,000 rate, after a 10.6% rise in the previous month.

By region, starts fell 13.6% in the West and 8.9% in the Midwest, Commerce officials said. New construction rose 5.6% in the Northeast and 2.8% in the South.

Building permits, an indicator of future construction, fell 4.3%, to an annual rate of 1.492 million units, the lowest since 1.456 million in December 1997. May recorded the fourth straight drop; April's was 2.4%.

Permits for single-family homes fell to a 1.25 million-unit rate in May, the lowest since 1.08 million in December 1997, Commerce officials said.

Washington Homes Inc., a builder just outside of Washington, said it had 1,473 homes sold but not completed as of April 30, a 19% increase from the same time a year earlier.

Still, sales of new homes may be starting to feel the effects of higher mortgage rates, which would eventually slow construction, analysts said. New-home sales in April fell 5.8%, to a seasonally adjusted annual rate of 909,000 units, the lowest level in five months, the Commerce Department said last month.

The average rate on a 30-year, fixed-rate mortgage was 8.22% in the week ended Friday, compared with a rate of 7.65% at the same time last year, Freddie Mac statistics show.

"I do see things slowing down," said Robert Toll, chairman and chief executive of Toll Brothers Inc., the nation's largest luxury home builder.

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