US home building experienced a significant decline in August, with a drop of 11.3% from July levels, as mortgage rates continued to stay high amidst lingering inflation concerns. According to data released by the Census Bureau on Tuesday, housing starts, a measure of new-home construction, fell to a seasonally adjusted annual rate of 1.283 million, well below the expected 1.44 million.
This drop in home building represents the lowest level since June 2020. Furthermore, the number of units started was 14.8% lower compared to the same time last year. The decrease was particularly prominent in single-family housing starts, which account for the majority of construction. There was a 4.3% drop in August from the revised July figure, with a seasonally adjusted annual rate of 941,000.
The decline in new home starts in August can be attributed to the rise in mortgage rates, which returned to their late 2022 peak after a brief increase in July. Kelly Mangold of RCLCO Real Estate Consulting highlighted the combination of high interest rates, high pricing, and limited inventory as ongoing issues affecting the housing market. In many cases, even purchasing the same home at current mortgage rates would be unaffordable for a typical buyer.
The reluctance among homeowners to sell and buy new homes with the current high rates has resulted in an extremely low inventory of existing homes for sale. This shortage has been advantageous for the new construction residential market, but it has not been sufficient to counteract the affordability factors that have dampened purchasing activity.
Mangold suggests that motivated buyers may find favorable deals as prices stagnate, and large builders who can offer mortgage buydowns can provide buyers with more competitive offers than those available in the resale market. However, the decrease in housing starts indicates that builders remain cautious about the potential impact of future mortgage rate increases on the market.
In a separate report from the National Association of Home Builders / Wells Fargo Housing Market Index released on Monday, it was revealed that home builder confidence was lower in September. The monthly index, which examines current sales, buyer traffic, and the sales outlook for new-construction homes in the next six months, dropped below the break-even measure of 50 for the first time in five months.
Despite the decrease in builder sentiment, builders are still applying for permits for new residential construction. Building permits, which track the number of new housing units granted permits, showed an increase of 6.9% in August compared to the revised number for July, reaching a seasonally adjusted annual rate of 1.443 million, the highest level in 10 months. However, permits were still 2.7% lower than they were a year ago.
While there are concerns surrounding the decline in US home building in August, the increase in building permits suggests that there is still an underlying demand for new residential construction. The housing market continues to face challenges due to high mortgage rates, high pricing, limited inventory, and affordability issues. It remains to be seen how these factors will impact the market in the coming months.