Housing slump hits US

A shock fall in housing starts last month brought more evidence that the American economy is slowing. The number of construction starts on new homes tumbled 7.9 per cent in March to the lowest level for two years, confounding most analysts' expectations.

The annual rate of new starts, 1.2 million after adjusting for seasonal variation, is well below the 1.4 million rate seen for most of last year. There has been a clear decline in housebuilding in the past three months.

The figures for housing starts in January and February were revised down. Applications for building permits have also fallen for three successive months, dropping 4.4 per cent in March.

Milder weather across most of the country was expected to have led to a recovery in March. Lower mortgage rates, due to the reduction in bond yields this year, should also have contributed to a stronger picture last month. As it turned out, only the North-east saw an increase in housing starts.

Of the fall of 102,000 starts last month, the West accounted for 72,000. Floods in California could have been part of the explanation.

Other possible culprits were the rise in mortgage rates throughout 1994 as the Federal Reserve increased its key interest rate 7 times, and the overhang of unsold new housing. The supply of unsold new properties rose from 6.8 months in January to 7.7 months in February - an unusually large stock, and the highest since mid-1990.

James O'Sullivan, an economist at JP Morgan in New York, said the steep drop last month exaggerated the picture, but added: "There is certainly no sign of a pick-up in the housing market."

The housing figures prompted a bond market rally, despite the dollar's weakness yesterday. Cheryl Katz, an economist at Merrill Lynch, said there was a definite slowdown in the economy's pace of growth in the first quarter.

The Wall Street consensus is that growth will slow again in the second quarter, meaning the Federal Reserve will probably not have to increase US interest rates any further.