New Construction Slows in August Due to Mortgage Rates and Weakening Demand
The pace of new construction in the housing market slowed down in August, according to a report released by the federal government on Tuesday. This comes as a result of high mortgage rates and weakening demand in the industry.
Housing starts, which refers to the beginning of construction on new homes, fell by 11.3% in August, reaching an annual rate of 1.28 million. This is the lowest level since the summer of 2020. However, building permits, which are pulled by builders in anticipation of demand, increased by 6.9% month over month to an annual level of 1.54 million. Despite this increase in permits, the housing starts still fell below the estimated 1.44 million, while permits exceeded forecasts.
One factor that could have influenced the decrease in new home starts is the impact of high mortgage rates and limited inventory. Kelly Mangold of RCLCO Real Estate Consulting explains, “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.”
Additionally, the weather can also affect the number of housing starts. Builders typically wait until lots are ready to be cleared following deposits on future purchases before beginning construction, and inclement weather conditions can delay this process.
The National Association of Home Builders (NAHB) also reported a decline in builder sentiment, which dropped below the break-even measure of 50 for the first time in five months. NAHB Chairman Alicia Huey attributes this decline to the increase in mortgage rates and the shortage of construction workers, buildable lots, and distribution transformers.
The housing market is currently facing the challenge of both elevated mortgage rates and a limited inventory of existing homes for sale. While new construction had initially helped to fill the inventory gap earlier this year, it now seems to be affected by the slowing demand.
Ksenia Potapov, an economist with First American Financial Corp, acknowledges the declining affordability as a hindrance for potential buyers. “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,” said Potapov.
Furthermore, the lack of available resale inventory has led potential buyers to turn to the new home market. A slowdown in construction would be concerning, as it would further exacerbate the underbuilt state of the housing market in relation to demand.
In conclusion, the slowdown in new construction in August can be attributed to high mortgage rates, limited inventory, and weakening demand in the housing market. As interest rates remain high, potential buyers are opting to wait, resulting in decreased builder sentiment. The housing market continues to grapple with affordability issues and a shortage of construction workers and materials, further impeding the construction of new homes.