Home starts weaker than forecast as Fed keeps stimulus

Builders began work on fewer U.S. homes than projected in August, helping explain why Federal Reserve policy makers decided to maintain stimulus aimed at sustaining the economic expansion.

Housing starts rose 0.9% to a 891,000 annual rate, following the prior month’s 883,000 pace that was weaker than previously estimated, a Commerce Department report showed today in Washington. The median estimate of 83 economists surveyed by Bloomberg called for 917,000. Permits, a proxy for future projects, dropped more than forecast.

Builders such as Hovnanian Enterprises Inc. say any industry slowdown caused by the highest mortgage rates in more than two years will prove short-lived. The yield on Treasury notes plunged today after the Fed unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs to see more signs of lasting improvement in the economy.

Housing starts “seem to have lost momentum, but we see it as a temporary slowdown,” David Sloan, senior economist at 4Cast Inc. in New York, and the second-best forecaster of housing starts in the past two years, according to data compiled by Bloomberg. “Higher rates are a restraint on the housing recovery, but won’t derail it.”

Stocks jumped after the Fed’s announcement, sending the Standard & Poor’s 500 Index to a record high. The S&P 500 climbed 0.9% to 1,720.47 at 2:36 p.m. in New York. The yield on the benchmark 10-year note dropped to 2.76% from 2.85% late yesterday.

Survey Results

Economists’ estimates for starts in the Bloomberg survey ranged from 880,000 to 980,000. The prior month was revised down from a previously reported 896,000 pace. Activity in June was also weaker than last estimated.

Building permits dropped 3.8% to a 918,000 pace, showing a lack of drive heading into this month. Applications were projected to ease to a 950,000 pace from 954,000, according to the survey median.

The plunge in Treasury yields today will probably mean borrowing costs will drop. The rate on 30-year home loans averaged 4.57% in the week ended Sept. 12, close to the highest level since July 2011, according to data from McLean, Virginia-based Freddie Mac. The rate, which had been as low as 3.81% at the end of May, has been rising since Fed Chairman Ben S. Bernanke that month indicated the central bank may slow its purchases of government and mortgage bonds.

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