New home construction fell steeply in 2007

WASHINGTON -- The steep slump in housing intensified at the end of last year, pushing home construction down by the biggest amount in nearly three decades. Analysts forecast more bad news in the months ahead with the big question remaining whether the housing slump will be severe enough to push the country into a recession.

The Commerce Department reported Thursday construction was started on 1.353 million new homes and apartments last year, down 24.8 percent from 2006. It was the second biggest annual decline on record, exceeded only by a 26 percent plunge in 1980.

The year ended on a weak note with construction dropping by 14.2 percent in December and applications for new building permits, a good indicator of future activity, falling for a seventh consecutive month, indicating activity will be weak at least through the spring of this year.

Economists said the current housing slump has already surpassed the 1990 downturn and will likely rival, if not surpass, the prolonged housing downturn in the late 1970s and early 1980s, a period when the Federal Reserve was pushing interest rates to the highest levels since the Civil War in a successful effort to halt a decade-long bout of high inflation.

Mark Zandi, chief economist at Moody's Economy.com, is forecasting that median sales prices for existing homes will fall by 2.5 percent for all of 2007, which would be the first annual price decline on records that go back four decades.

"I think this housing downturn will be unprecedented in terms of its breadth across the country and in its severity," Zandi said. "I don't think we have seen anything like this, certainly since the Great Depression, and back then housing was much less of a factor in terms of the overall economy because fewer people owned their own homes."

The Dow Jones industrial average fell by 306.95 points Thursday to close at 12,519.21. Investors were concerned about the weak housing figures and a report from the Philadelphia Federal Reserve Bank which showed a significant drop in manufacturing in that region.