The pace of new construction slowed in August amid high mortgage rates and weakening demand, the federal government reported on Tuesday.
Housing starts fell 11.3% in August to an annual rate of 1.28 million, the lowest since the summer of 2020. Building permits, however, increased 6.9% month over month to an annual level of 1.54 million. Starts came in well below estimates of 1.44 million while permits were higher than forecasts for the same amount.
Builders typically pull permits in anticipation of demand, but housing starts occur when lots are ready to be cleared following deposits on future purchases. Starts also can be affected by weather.
“New home starts declined in August after rising in July, as we continue to see interest rates bringing mortgage rates back to levels close to their late 2022 peak,” said Kelly Mangold of RCLCO Real Estate Consulting. “The combination of high interest rates, high pricing, and limited inventory has continued to plague the housing market. Housing mobility is down as many owners who might typically have sold have decided to stay and upgrade their existing homes instead of purchasing a larger or more well-appointed move-up model. “
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The report follows news from the National Association of Home Builders on Monday that its monthly measure of builder sentiment dropped below the break-even measure of 50 for the first time in five months.
“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7% and significantly eroded buyer purchasing power,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama. “And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, which is further adding to housing affordability woes. Insurance cost and availability is also a growing concern for the housing sector.”
Housing is facing the twin effects of elevated mortgage rates and a limited inventory of existing homes for sale. While new construction had picked up earlier this year to partially offset the inventory gap, it now looks as if it is being negatively affected by a slowing in demand.
“Declining affordability is holding back potential buyers as mortgage rates remain above 7% for the fifth week in a row,” said Ksenia Potapov, an economist with First American Financial Corp. “Builders continue to offer price discounts and incentives, but high mortgage rates are weighing on builder sentiment as some potential buyers choose to wait on the sidelines.
“Potential buyers have increasingly been turning to the new home market to meet their demand as resale inventory remains extremely limited,” Potapov added. “A slowdown in construction would be concerning, especially as the housing market remains underbuilt relative to demand.”
https://www.usnews.com/news/economy/articles/2023-09-19/new-home-construction-tumbles-in-august
