Home construction suffers steepest drop in 14 years

Construction of new homes and apartments plunged by 17.6 percent in March, the biggest decline in 14 years and another possible indication that rising interest rates are beginning to take a toll on the economy. Meanwhile, wholesale inflation shot up 0.7 percent as energy prices soared.

The Commerce Department reported earlier this week that builders started construction on new homes and apartments at a seasonally adjusted annual rate of 1.84 million units in March, down from 2.23 million units in February.

Analysts had been expecting a decline in housing, but the steepness of the drop, the biggest plunge since January 1991, caught them by surprise.

"This is a bit of a shocker," said David Seiders, chief economist for the National Association of Home Builders. "But I don't think this represents a fundamental downshift in the housing market. There were special factors behind it."

Analysts blamed unusually wet weather in March, which hampered construction activity in some parts of the country, and seasonal adjustment factors that had inflated activity in the previous two months of unseasonably mild weather in many parts of the country.

But many analysts said they believed the housing report could be signaling a peak for the red-hot housing market, with declines expected in the months ahead as higher mortgage rates put a damper on an industry that has posted four straight years of record sales figures for both new and existing homes.

Kathleen Bostjancic, an economist at Merrill Lynch, noted that the drop in housing starts was the fourth indicator for March to show a loss in momentum for the economy. Employment growth, retail sales, manufacturing production and now housing have all shown disappointing results.

Analysts said all of these reports taken together implied the economy was losing some steam under the impact of higher interest rates and the recent surge in energy prices.

The report on housing construction showed that construction was down in all parts of the country led by a 29.3 percent drop in the Midwest, an 18 percent decline in the South, a 12.7 percent fall in the West and a 3.6 percent decline in the Northeast.