Mortgage Rates Challenge Homebuilder Sentiment Amid New Construction Surge

mortgage rates challenge homebuilder sentiment amid new construction surge.jpg Business

In a climate of soaring mortgage costs and a cooling job market, all eyes will be on the U.S. Census Bureau this Tuesday as it unveils its monthly estimate of new housing starts. Investors are bracing themselves for a probable modest dip in construction activity, with economists predicting an annual run rate of approximately 1.44 million units for August, down from July’s figures. This anticipated decline underscores the strain the housing market is under, as mortgage rates hover at their highest levels since 2001, and the labor market begins to show signs of slowing down as autumn approaches.

Despite these headwinds, the past year has seen a steady uptick in new home sales, outpacing the sale of existing homes as homeowners, locked into low mortgages, are hesitant to sell and refinance at a significantly higher rate. However, the relentless surge in mortgage costs, a consequence of the Federal Reserve’s battle against inflation, appears to be taking its toll on market sentiment. The National Association of Homebuilders’ (NAHB) closely-watched survey indicated a sharp six-point drop in builder confidence in September, plunging to a six-month low and marking its first dip below the crucial 50-point mark in five months.

US Housing Starts Predicted to Slow Amid High Mortgage Rates and Cooling Job Market

The US Census Bureau is expected to release its monthly estimate of new housing starts this Tuesday. Economists’ forecasts indicate that there may be a slight decrease in construction activity due to persistent high mortgage rates and a cooling job market into the autumn months.

Moderate Decline in August Housing Starts

Housing starts in August are anticipated to experience a modest drop from July, with an annual run rate hovering around 1.44 million units. The permits for new construction, a reliable bellwether of near-term housing demand, are estimated to follow a similar trend.

The Impact of Rising New Home Sales

Over the past year, housing starts have been bolstered by a steady increase in new home sales, which have been consistently outperforming existing home sales. This has been largely due to homeowners, who are locked into low mortgages, resisting the urge to sell and refinance at higher rates. In fact, sales of new homes in July hit a 17-month high, increasing 4.4% to an annualized rate of 714,000. This surge was notwithstanding mortgage rates pushing past 7%, the highest level since 2001.

Builder Confidence Dwindles Amid High Mortgage Costs

However, the unceasing increase in mortgage costs, driven by the Federal Reserve’s efforts to combat inflation, appears to have dented market sentiment. The National Association of Homebuilders (NAHB)’s survey, a critical measure of builder confidence, plunged six points to a six-month low of 45 points in September, breaking below the 50-point mark for the first time in five months.

Alicia Huey, NAHB Chairman, attributed the two-month slide in builder sentiment to mortgage rates breaching the 7% mark, which significantly reduced buyer purchasing power. "On the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, further exacerbating housing affordability issues. Insurance cost and availability is also becoming an increasing concern for the housing sector," she added.


The upcoming report on US housing starts will provide critical insights into the health of the housing sector amid rising mortgage rates and a slowing job market. The current scenario underscores the delicate balancing act the Federal Reserve is performing – combating inflation while ensuring economic growth. Meanwhile, the housing sector is grappling with its own set of challenges, such as labor and supply shortages, which are contributing to an affordability crisis. These dynamics suggest that both policymakers and stakeholders in the housing industry have to navigate a complex environment in the coming months.

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