Rate hike slows pace of hammers

US building industry shows first signs of an economic slowdown.

At Newborg Enterprises in Arlington, Va., the phones won't stop ringing. The concrete and masonry contractor has too few workers and - if there can be such a thing - too much business.

Two hours away in Richmond, the phone is also ringing. But at Dumont Construction, it's for a rather different reason: tradesmen looking for work.

The discrepancy reflects the ambiguous state of the American economy. While most of the nation continues its record-setting sprinter's pace, in some areas there are signs the economy's shoelaces are starting to come untied. And nowhere are the early indications of a transition more apparent than in the country's building and real estate industries.

The man stepping on the economy's heels is Federal Reserve Chairman Alan Greenspan, who has approved five interest-rate hikes since June, the latest on Tuesday. Analysts expect at least a couple more increases later in the year.

Among the men and women who lay tile, install wallboard, and run wires for a living, there is a mixture of relief and wariness at the rate increases. That's because the market for housing and commercial buildings in recent years has been hotter than a Mississippi summer. Now there are hints things are becoming more stable - if only slightly.

Indeed, the hyperactive housing market was among the reasons the Federal Reserve started raising interest rates last summer - the sheer demand for construction was causing inflationary pressure, as builders bid up supplies and workers. What should have been a good situation for contractors, though, caused its share of frustration.

"Last year was the worst," says Mike Dumont, the contractor. "There was 2 percent unemployment in Richmond, and everybody was trying to steal people from everybody else."

Enter the Fed, whose rate increases should have been a steady foot on the brakes of the housing market. The reality isn't so simple.

Overall numbers show a hint of slowing in the housing market. But in many parts of the US, like in Sun Belt cities and much of California, the building business remains as fast-growing as ever.

In February, there were 2.5 percent more new housing starts than a year before, although related indicators point to the beginnings of a slump.

The National Association of Home Builders' index for the housing market was down in February, to 61 from 69, but that remains well above the benchmark level of 50.

On the job site, the picture is similarly murky. "I've been in business for 20 years, and things are as busy as I've ever seen them," says Steven Newborg, the mason.

"The first couple of hikes drove my traffic away from my site, but around the first of the year traffic returned and they're buying homes," says Kim Tingley, of Tingley Construction Co. in Richmond. He has had trouble keeping subcontractors for the 30 or so starter homes he builds each year. "It's increased my construction time, because I can't get labor when I need it."

But the biggest excesses of the boom have slackened - tales of 80-hour work weeks and stratospheric wages are harder to find now than they were before the rate hikes. "I've built homes where it took 30 days to get framing carpenters," says Mr. Dumont. "I've had to pay somebody $5,000 extra to get them from another job. Now we're at a little more of a balance."

That five rate gains in nine months have had such a minor impact is testament to the underlying strength of the economy, say analysts - and perhaps also evidence of a weakening of the Fed's power to pull its strings.

"There's so much positive spin on the economy that a point in the interest rate doesn't matter too much," says Tom Black of the Web site Mortgageit.com.

Indeed, Web sites like his are one of the reasons interest rates have less of an impact on the housing market. People have more options than they did when the local banker offered a single take-it-or-leave-it 30-year fixed-rate mortgage.

"Interest sensitivity ain't what it used to be," says David Seiders, the chief economist of the National Association of Home Builders. "The impact of higher rates is not as abrupt as it used to be or as powerful."

Mortgage broker John Nicklas of the Mortgage Center of America in Raynham, Mass., says the price of housing has climbed to new heights in the past six to eight months despite the Fed's efforts. But fewer transactions are leaving him with a 50-hour work week instead of the 80 hours of a year ago.

"It hasn't really pinched people hard enough for them to make an adjustment in their life," says Dumont.

All of which leaves the building industry a bit antsy. They worry that with the minimal impact of the last rate increases, Greenspan will go on raising rates to the point where it really cuts into business. Meanwhile, the Fed will try to lasso this economy into a gradual slowing, without strangling it.

(c) Copyright 2000. The Christian Science Publishing Society

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