In a surprising turn of events, construction of new U.S. homes fell by a staggering 11.3% in August, coming up short of Wall Street projections. The downturn comes as builders shift their focus from initiating new projects to completing existing ones, a decision influenced by the consistent mortgage rates that have hovered over 7%, thereby curbing home-buying demand. This sluggish pace in construction marks a stark contrast to the industry’s vibrancy in June 2020, the last time we saw this level of activity.
Adjustments in housing starts, a term used to refer to the number of new residential construction projects that have begun over a specific period, further underscore the industry’s slowdown. According to government reports, housing starts dropped to a 1.28 million annual pace from 1.45 million in August, a figure that far undercuts economists’ expectations of a 1.43 million drop. This decline represents how many houses would be built over the course of a year if the construction rate remained constant, as it did in August.
U.S. Housing Construction Slows Down Amid High Mortgage Rates
A Shift in the Housing Market
The construction of new homes in the U.S. witnessed a significant fall of 11.3% in August as builders cut down on new projects to concentrate on completing existing ones. This decline in housing starts fell short of Wall Street’s expectations, marking a reversal in the pace of construction. The last time construction was at this level was back in June 2020.
Fueled by mortgage rates remaining above 7%, the demand for home buying has dampened. Housing starts fell to an annual pace of 1.28 million from 1.45 million in August, according to the data released by the government. This figure represents the number of houses that would be built over a year if the construction rate remained the same as it was in August.
Economic Expectations and Reality
Economists on Wall Street had anticipated a drop in starts to 1.43 million, however, the reality proved to be harsher. The number of homes started in July was also revised downwards to an increase of 2% to 1.45 million from an initial reading of a 3.9% gain.
Notably, housing starts peaked at 1.8 million in April 2022, but new homes have now become the dominant player in the housing market. In response to the persistently high rates and anticipated waning demand, builders have reportedly begun to implement price cuts to stimulate buyer demand.
Future Construction and Current Patterns
In a positive turn, building permits, which serve as an indicator of future construction, rose by 6.9% to a 1.54 million rate, marking the highest level since October 2022.
The construction pace varied across different types of homes and regions. Single-family home construction fell by 4.3% in August, and apartment-building construction saw a larger drop of 26.3%. However, builders ramped up single-family home construction in the South, where starts rose by 8.1% in August.
Builder Confidence and Market Reactions
Builder confidence in September fell to its lowest level in five months, according to the National Association of Home Builders (NAHB). The increasing mortgage rates have led to concerns about demand impact, causing a pullback on new developments. Despite this, the long-term need for housing and a decade of underbuilding may prevent a sustained drop in demand.
In terms of market reaction, U.S. stocks were set to open higher early Tuesday. The yield on the 10-year Treasury note rose above 4.3%.
Takeaways
The housing construction slowdown is a direct result of persistently high mortgage rates. While builders are cautious, the rise in building permits indicates future growth. However, the industry needs to be cognizant of the changing market dynamics and devise strategies to ensure sustainable growth amidst fluctuating mortgage rates. The government and regulatory bodies also need to closely monitor these trends to stabilize the housing market and contain inflation.
