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Housing boom cooling

Construction dropped 5.6% last month; decline in permits is biggest in 6 years

WASHINGTON — Housing construction and new building permits were down sharply in October, providing fresh evidence that rising mortgage rates are beginning to cool the five-year housing boom.

The Commerce Department reported Thursday that construction of new homes and apartments fell by 5.6 percent last month, the biggest decline in seven months. Applications for new building permits, a good sign of future activity, fell by 6.7 percent, the biggest decline in six years.

Analysts said these weaker-than-expected figures, combined with evidence homes are staying on the market longer, indicate the hot real estate market is cooling off.

"We are likely to see a steady downward trend in housing activity over the next few months all tied to rising mortgage rates," said Nariman Behravesh, chief economist at Global Insight, a Lexington, Mass., forecasting firm.

The fear is that home values have soared to such high levels that a slowing in demand could cause those prices to drop sharply, raising risks to recent purchasers who could end up with mortgage burdens that are higher than the falling values of their homes.

Behravesh doesn't see that happening, saying higher mortgage rates "should serve to cool the market down without precipitating any kind of nasty scenario."

On Wall Street, stocks surged Thursday with investors cheered as oil prices fell to their lowest levels in five months. The Dow Jones industrial average rose 45.46 points to close at 10,720.22.

The National Association of Realtors reported Tuesday that 69 cities around the country saw double-digit price gains during the July-September quarter, compared with the same period a year ago, led by a 55.2 percent surge in the Phoenix area and a 44.8 percent jump in home prices in Fort Myers, Fla.

Nationally, median prices for existing homes were up 14.7 percent in the third quarter compared with a year ago.

Analysts said as sales slow, double-digit price increases are likely to be a thing of the past as the Federal Reserve keeps pushing interest rates higher to combat inflation pressures.

Freddie Mac reported Thursday that the 30-year mortgage rose to 6.37 percent this week, the highest level in more than two years and well above this year's low of 5.53 percent set in June.

In addition to the big drop in construction starts in October, the National Association of Home Builders said a new survey showed builder optimism fell in November by the largest amount since right after the Sept. 11, 2001, terrorist attacks.

David Seiders, chief economist for the home builders, said he believes sales of both new and existing homes, while still setting records for a fifth consecutive year in 2005, will be down by around 5 percent next year, representing "an orderly simmering down process."

But he cautioned that there were risks that the drop-off in activity could be more severe. He said one of the biggest risks is if housing purchased by speculators starts being dumped on the market, causing a glut that will sharply depress prices.

In other economic news, the Federal Reserve reported that industrial output posted a solid rebound of 0.9 percent last month, reflecting the end of a strike at aircraft maker Boeing and the resumption of factory activity along the ravaged Gulf Coast.

In September, industrial production had fallen by 1.5 percent, the biggest drop in more than two decades.

In another sign that the economy is recovering from the hurricanes, the Labor Department said storm-related job losses edged down last week to 19,000, far below the high of 108,000 hurricane-related layoffs recorded the third week of September. Over the past 11 weeks, the number of jobs lost because of hurricanes Katrina, Rita and Wilma totaled 561,400.

Overall jobless claims fell by 25,000 last week to a seasonally adjusted 303,000, the lowest level since mid-April.