Softer Housing Sector Is Seen,
But Data Don't Point to Collapse

U.S. home builders stepped up the pace of new construction in May after three months of declines, a sign that the housing market is softening but not collapsing.

The Commerce Department said housing starts rose 5% last month from April to an annual rate of 1.96 million units, but were down 3.8% from a year earlier. Building permits, an indicator of future trends in new residential construction, fell 2.1% last month and were running 8.5% lower than a year earlier.

The faster pace of new-home building in May is confirmation that the housing market is experiencing what Federal Reserve Chairman Ben Bernanke recently described as an "orderly and moderate" correction following last year's peak. That bodes well for the economy, though analysts anticipate more weakness in the housing market during the rest of the year.

"Housing starts surprised to the upside, but May's rebound is almost certainly a temporary pause in the downward trend," said Haseeb Ahmed, U.S. economist at J.P. Morgan Chase & Co. Other economists were puzzled about why builders would keep ramping up the supply of new homes when demand is on the wane. Daniel Oppenheim, an analyst at Bank of America Securities, said the gap between starts and sales traffic was at the "highest level in at least the past 20 years," a development that would lead to "even higher inventory and more pricing pressure."

There are proliferating signs that builders are responding to widespread expectations that the housing boom is ending. Robert Toll, chief executive of Toll Brothers Inc., the luxury-home builder based in Horsham, Pa., said the industry also faces an increasingly negative psychology among prospective buyers, despite historically low interest rates and a relatively strong economy. He attributes some of that negativity to media reports about the housing slowdown. "If you go to a party and tell people that you bought a new house, people look at you like you are crazy," he said.

Toll Brothers last month reported that orders for new homes fell 32% in the latest quarter. On Monday, KB Home, the big Los Angeles builder, said it had laid off some 7% of its workers.

In May, starts of single-family homes rose 2.1% from April, but were 7.6% lower than a year earlier, with the declines particularly pronounced in the Midwest. The South is the only region where the rate of new-home construction is up from a year earlier.

One bright spot for builders has been the construction of apartment buildings. Housing starts for residential structures with five or more units leapt 25.4% in May and were nearly 15% higher than a year earlier.

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