The Associated Press
Updated: 9:18 a.m. ET June 16, 2005
WASHINGTON - Construction of new homes rose 0.2 percent in May as the housing market continued its boom in response to low mortgage rates.
The Commerce Department reported that construction of new homes and apartments edged up to a seasonally adjusted annual of 2.009 million units, up from 2.005 million units in April, a month when construction activity had jumped by 9.4 percent.
The increase, the fifth in the last six months, was slightly lower than the 0.6 percent gain that economists had been forecasting. But it still showed that homes and apartments are being built at a sizzling pace that has raised some concerns that a speculative bubble may be developing in housing similar to the stock market bubble of the late 1990s.
Federal Reserve Chairman Alan Greenspan said last week that low mortgage rates were contributing to some “froth” in local markets. But he discounted the worries of some private economists that a national housing bubble could be developing similar to the boom on Wall Street that pushed stock prices to all-time highs before the bubble burst in early 2000, wiping out more than $5 trillion of wealth.
Greenspan, however, said he was concerned about the dramatic increase in interest-only mortgages and the introduction of relatively exotic forms of adjustable-rate mortgages.
“To the extent that some households may be employing these instruments to purchase a home that would otherwise be unaffordable, their use is beginning to add to the pressures in the marketplace,” he told the Joint Economic Committee.
The 0.2 percent increase in construction reflected a 4.7 percent increase in construction of single-family homes, which rose to a 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 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 of the country which 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.