Housing starts fell for three straight months after hitting a 33 year high in January, a fact that many analysts took as a sign that the housing market was slowing significantly. The month of May, however, brought some good news to the sector as home construction exceeded most Street expectations and rose 5% to an annualized rate of 1.957 million units, according to the U.S. Commerce Department.

The rate rebounded in May from a 13-month low, largely due to the fact that builders worked on backlogs and used incentives such as free car leases to win new business in the less robust market.

Not everyone was surprised at the increase, however. RBS Greenwich Capital's Chief Analyst Omair Sharif said, "As we pointed out in last week's write-up, most of April's 6% decline was due to a sharp pullback in the South and a weather-induced drop in the West, and we had looked for starts in both regions to bounce in May."

Indeed, housing starts in the South rose by 9%, increased in the West by 16% and started rising in the East by 2%. Only the Midwest saw a fall, down by 16% in May after April's 19% rise. Moreover, single-family starts went up by about 2%, while multifamily starts jumped even higher, up 20% last month.

Not exactly a positive sign

However, May's mostly impressive statistics may not be a sign of continued increases in the near future. Building permits, an indicator of upcoming construction, declined last month by a little over 2%, and is down by about 12% since January. However, the six-month average of 2.07 million permits was only down about 4% from last year's pace.

"While we do not dispute the notion that the sector has slowed noticeably following torrid performances in the last few years, we have been pointing out for some time that starts were likely to slow more gradually than many anticipated," Sharif said.

He expects that bloated backlogs in the sector will keep builders occupied until the end of 2006.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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