updated 6/16/2005 3:01:16 PM ET 2005-06-16T19:01:16

The housing market is still booming with construction of new homes rising 0.2 percent in May. Builders rushed to break ground on new projects to meet strong demand fueled by low mortgage rates.

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The May increase left construction of new homes and apartments at an annual rate of 2.009 million units last month, up from 2.005 million units in April, when construction activity jumped by 9.4 percent. Housing starts have been above the 2 million annual rate in seven of the last 10 months.

While the May increase was slightly below the 0.6 percent gain that had been forecast, economists blamed a decline in the South on the temporary effect of unusually wet weather in Florida and other parts of the South. They noted that permits for new construction, a key indicator of future strength, came in at a solid annual rate of 2.050 million units.

“We still have a red-hot housing market,” said David Seiders, chief economist of the National Association of Home Builders. “Surveys of both lenders and builders are showing tremendous ongoing strength with little or no hints that anything is starting to fall.”

Brian Bethune of Global Insight said the current backlog of building permits should translate into housing construction moving “at full bore for several more months.”

The strength in housing construction reflects the fact that sales of both new and existing homes climbed to record highs in April as mortgage rates fell.

The Mortgage Bankers Association reported that mortgage applications jumped by 17.4 percent last week from the previous week with mortgages to finance new purchases hitting an all-time high.

Despite the fact that the Federal Reserve has been pushing short-term interest rates higher for the past year, long-term rates such as mortgages, which are set by financial markets, have been falling for much of this year.

Freddie Mac reported Thursday that the nationwide average for a 30-year mortgage edged up to 5.63 percent this week, up from 5.56 percent last week. It was only the second time rates on 30-year mortgages have risen in the past 11 weeks and still left them well below their level this time a year ago of 6.32 percent.

But many analysts said they believed mortgage rates will now start rising, reflecting recent increases in the benchmark 10-year Treasury note. Seiders predicted 30-year mortgages will be around 6.1 percent by the close of this year, up about one-half percentage point from where they are now.

Fifth straight record year expected
This increase will not be enough, however, to keep sales of both new and existing homes from setting records for the fifth straight year, given the momentum already built into the market, Seiders predicted.

Federal Reserve Chairman Alan Greenspan said last week that low mortgage rates were contributing to some “froth” in local markets. He also expressed concern about the dramatic increase in interest-only mortgages and the introduction of other exotic forms of adjustable-rate mortgages that could increase the risk of defaults by home owners when interest rates rise.

While Greenspan repeated his belief that there is no national bubble in housing prices, private economists said his concerns highlighted the risks that home prices could fall sharply in some of the hottest markets once mortgage rates begin to rise.

The 0.2 percent increase in building activity in May reflected a 4.7 percent increase in construction of single-family homes, which rose to an annual rate of 1.704 million units last month. Construction of apartments, however, fell by 19.1 percent to an annual rate of 266,000 units.

By region of the country, construction was up 18.7 percent in the Midwest to an annual rate of 185,000 units, followed by a 12.3 percent gain in the West, where homes and apartments were started at an annual rate of 540,000 units. Construction activity was also up in the Northeast, which recorded a 5.1 percent increase to an annual rate of 185,000 units.

The only region that suffered a decline in activity last month was the South, where housing starts fell 12.1 percent to an annual rate of 903,000 units.

In a second report, the Labor Department said that new claims for unemployment benefits rose by 1,000 last week to total 333,000. The small increase followed a big drop of 19,000 in the level of claims the previous week.

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