Housing Rocks, Consumer Balks in Latest Data

Updated from 11:06 a.m. EDT

The economic news had a familiar ring Tuesday, with data showing the real-estate market continuing to hum while consumers remain restive.

The Commerce Department said housing starts rose to their highest level in 17 years last month, reflecting enthusiasm for low mortgage rates that look increasingly endangered after the selloff in the bond market. But building permits, which indicate future construction, came in lower than economists had forecast.

Meanwhile, the University of Michigan said its preliminary consumer sentiment index for August dipped to 90.2 from 90.9 in July, reflecting weakness in respondents' assessment of their current economic situation. With few signs the job market is bouncing back, economists said the weakness comes as little surprise, even though the average estimate was for a rise to 91.5.

On an annualized basis, construction began on 1.872 million homes last month, a rise from June's revised 1.845 million and the strongest since April 1986. Economists had expected the figure to drop to 1.790 million.

"This just confirms the housing market shows no signs of letting up," said Bill Natcher, senior economist, National City Corp. "Demand for housing is still strong and the very attractive rates are keeping buyers in, with supply responding to that."

Home buyers rushed to lock in historically low mortgage rates in June, before the rise in Treasury yields in July forced interest rates higher. The 30-year fixed mortgage rate reached a record low of 5.11% in June, and has since risen to 6.07%, according to Bankrate.com.

Joel Naroff, senior economist at Naroff Economic Advisors, noted: "Starts are a result of purchases already made, and the typical reaction on the part of buyers when dealing with mortgage rates is to move before they get too high, to make the purchase while they can still afford it."

The latest increase in mortgage rates is a reflection of the rise in the 10-year Treasury note yields as investors anticipate an economic recovery coupled with stronger inflation in the U.S. The 10-year note was recently up 18/32 to 98 29/32, with the yield falling to 4.25%.