WASHINGTON -- Housing construction fell short of expectations again in July, yet most analysts say they still expect the market to pick up modestly throughout the rest of the year.

Their comments came yesterday after the Commerce Department reported that housing starts fell 2.7% in July to a seasonally adjusted annual rate of 1.212 million units. Economists generally had expected little or no change in July starts.

The July decline followed a 0.2% drop in June and is the fourth monthly decline in the first seven months of this year, according to department data. Total housing starts so far this year are only 2% ahead of last year's pace -- well short of analysts' expectations earlier this year.

"It was disappointing but not entirely unexpected," said David Berson, chief economist of the Federal National Mortgage Association. He attributed much of the weakness to flooding in the Midwest and heavy rains in several areas.

Housing starts will drift above the 1.3 million rate in the coming months, in time to push the 1993 yearend total 5% to 6% above last year's mark, Berson predicted. Persistently low mortgage rates and employment growth should keep the housing market on at least a modestly upward trend, he said.

However, other economists downplayed the weather-related effects in the July data. And a Commerce Department official said it is unlikely that the Midwest flood had much effect on the July data.

Housing starts fell 4.0% in the Midwest in July, compared to an 11.9% decline in the West, according to department data. But housing starts gained 2.5% in the South and inched up 0.8% in the Northeast, the department said.

Housing construction has remained weak because people are reluctant to buy their first house or buy a bigger one, which results from their apprehensions about job security and the prospect of higher taxes, according to Jeff Thredgold, chief economist of KeyCorp. "It's no longer a price decision regarding mortgage rates as much as it is a confidence issue," he said.

Thredgold said he expects mortgage rates to drift even lower, which would coax more fence-sitters to take the plunge and buy a house. He predicted that housing starts will improve in the last five months of the year, putting total yearend starts about 5% higher than last year's level.

"With mortgage rates this low, we would have expected the housing market to show more strength that it has," said Sam Kahan, chief economist of Fuji Securities Inc.

Sluggish employment growth is the primary cause of the weak housing market, Kahan said. When that improves, the housing sector and consumer confidence will follow suit, he predicted.

"The housing market is okay, but not robust," Kahan said. He predicted that monthly housing starts will hover in the 1.25 million to 1.3 million rate range throughout the rest of this year, and at best total yearend starts will be up 4% from last year.

Specifically, the July decline in total housing starts resulted from a 1.7% drop in single-family units coupled with a 9.5% decrease in multi-family units, the Commerce Department said. In June, starts of single-family units fell 2.6%, but multi-family units gained 19.1%, the department said.

Berson predicted that starts of multi-family units are likely to remain relatively weak through the rest of the year.

Building permits were one bright spot in yesterday's report. The department reported that permits, a somewhat more leading indicator of building activity, gained 3.0% in July, to a rate of 1.149 million units. This followed a 0.5% drop in June, the department said.

A 4.5% gain in building permits for single-family houses more than offset a 4.2% decline in multi-family units, department data showed.

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