WASHINGTON - U.S. home construction fell in June to the slowest pace in nine months, a setback to hopes that housing is regaining momentum and will boost economic growth this year.
Construction fell 9.3 percent last month to a seasonally adjusted annual rate of 893,000 homes, the Commerce Department said Thursday. That was the slowest pace since last September and followed a 7.3 percent drop in May, a decline even worse than initially reported.
Applications for building permits, considered a good indicator of future activity, were also down in June, dropping 4.2 percent to a rate of 963,000 after a 5.1 percent decline in May.
The worse-than-expected June performance reflected a big drop in activity in the South, where construction plunged by 29.6 percent last month.
Analysts, however, said that the June decline in construction may have been influenced by temporary factors such as heavy rain in parts of the South which could have held back housing starts in that region.
Jennifer Lee, senior economist at BMO, said it was too soon to conclude that the housing recovery has stalled. "After all, job growth continues, mortgage rates are near their lows for 2014 and homebuilder confidence has been increasing," she said in a research note.
"In short, much weaker than expected, but the data are volatile and the plunge in starts was all in one region. We view the homebuilder survey as more of trend-setter over time -- it suggests that the weakness in this report be discounted," said Jim O'Sullivan, chief U.S. economist at research firm High Frequency Economics.
The overall weakness reflected a 9 percent fall in construction of single-family homes, the biggest part of the market, and a 9.9 percent drop in construction of apartments and other multi-family units.
All of the June weakness was confined to the South, where about 40 percent of home construction occurs. Construction was up 14.1 percent in the Northeast, 28.1 percent in the Midwest and 2.6 percent in the West.
Home construction has struggled to gain traction this year, limiting its ability to contribute to economic growth. Part of the weakness reflected an unusually severe winter which hampered construction. But rising home prices, a rise in mortgage rates from historically low levels and tighter lending standards imposed since the financial crisis have also been a barrier, especially for potential first-time buyers.
There still is hope that housing will perform better in the second half of the year although Federal Reserve Chair Janet Yellen told Congress this week that the slowdown in housing is one of the concerns at the Fed and that its forecast for an economic rebound may prove to be too optimistic.
The National Association of Home Builders, however, reported Wednesday that homebuilder confidence surged in July, reflecting heightened expectations that the second half of the year will see rising sales. The builders' sentiment index rose to 53, up four points from a revised reading of 49 in June. Readings above 50 indicate more builders view sales conditions as good rather than poor. The July reading was the first month above 50 since January when the index stood at 56.
New home sales surged 18.6 percent in May to a seasonally adjusted annual rate of 504,000, the highest level in six years, while sales of previously owned homes rose 4.9 percent, the biggest one-month gain in nearly three years, to a rate of 4.89 million homes.
Even with the big May increases, sales of new homes are still running at just about half the pace of a healthy real estate market.
Economists expect there is a lot of pent-up demand for homes after many potential buyers put off purchases during the 2007-2009 recession and the weak recovery since that time. Job growth has accelerated in recent months, with an increase of 288,000 jobs in June. That has helped to push down the unemployment rate to a nearly six-year low of 6.1 percent in June.
There is optimism that employers will step up their hiring further in the second half of this year as they respond to a rebound in overall economic growth following a weak winter.
The economy shrank at an annual rate of 2.9 percent in the January-March quarter but analysts believe growth rebounded to around 3 percent in the April-June quarter and will remain around that level for the remainder of this year.