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.

Sept. 18 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke speaks about the central bank’s decision to maintain the $85 billion pace of monthly bond purchases. He speaks at a news conference in Washington. (This is an excerpt. Source: Bloomberg)

Housing starts rose 0.9 percent 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 1.2 percent to 1,725.52 at the close in New York. The yield on the benchmark 10-year note dropped to 2.70 percent from 2.85 percent 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 percent 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 percent 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 percent 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.

Fed’s View

“The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,” Fed policy makers said today in announcing their intention to maintain stimulus.

Builder confidence remains high even as borrowing costs jump. Sentiment held in September at the highest level in almost eight years, figures from the National Association of Home Builders/Wells Fargo showed yesterday.

The advance in mortgage costs is unlikely to halt the nation’s housing recovery, Red Bank, New Jersey-based Hovnanian said. The company reported a profit for its fiscal third quarter as net contracts climbed 1.8 percent and the contract backlog, an indication of future sales, jumped 18 percent to 2,893 homes.

The company is confident any hesitancy from its customers caused by the jump in borrowing costs “will be a temporary bump in the road to housing recovery,” Chief Executive Officer Ara Hovnanian said on a Sept. 9 conference call with analysts.

Executives’ Outlook

Other companies aren’t as upbeat about the outlook. Fewer chief executive officers in the U.S. project a pickup in sales and capital spending in the next six months as the budget debate in Washington puts hiring plans on hold, a survey today showed. The Business Roundtable’s economic outlook index dropped to 79.1 in the third quarter from a one-year high of 84.3 in the previous three months, the Washington-based trade group said.

Thirty-two percent of corporate leaders plan to boost payrolls, unchanged from the second quarter, the survey also showed. Half of the CEOs surveyed said the disagreement over the 2014 U.S. government budget and the debt ceiling was having a negative impact on hiring plans.

Faster hiring and more widespread access to credit are probably needed to help foster bigger gains in housing demand.

The weakness in construction and permits last month was concentrated in the more volatile multifamily area. Work on townhouses and apartment buildings dropped 11.1 percent to an annual rate of 263,000. The number of applications for future work declined 15.7 percent.

Single Family

Construction of single-family houses climbed 7 percent in August to a 628,000 rate, the most since February, from 587,000 the prior month. Permits for future projects climbed 3 percent to a 627,000 rate. The almost identical readings in the number of permits and of single-family starts last month leaves little scope for a pickup in construction this month.

Three of four regions showed a decline in housing starts last month, led by a 10.9 percent slump in the West, today’s report showed. New projects climbed 12 percent in the South, the largest market.

Bloomfield Hills, Michigan-based PulteGroup Inc. expects the run-up in borrowing costs will vary across consumer segments, James Zeumer, head of investor relations, said on a Sept. 10 teleconference. For first-time buyers, a half-percentage-point rise in interest rates means “there will be some of them that will be out of the game,” he said, while the move-up buyers “have a little bit more flexibility.”


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