Topline
New housing starts unexpectedly plunged more than economists projected in July—and to the lowest level in more than a year—as home builders grappled with dwindling demand for new homes, and though some experts remain optimistic the market could be due for a quick recovery, others are only increasingly bearish.
Key Facts
The number of housing starts, or new houses on which construction has started, plunged 9.6% to about 1.4 million last month despite average economic projections projecting more than 1.5 million starts, the Census Bureau reported Tuesday.
Building permits were slightly above expectations at nearly 1.7 million, but fell about 1.3% from June and are down from about 1.8 million in April.
“Builders are responding to a pullback in demand,” Odeta Kushi, an economist at First American, said in emailed comments, explaining that rising mortgage rates have dampened affordability and “caused would-be buyers to sit on the sidelines.”
In one bright spot, permits for multi-family units rose 2.8% last month, helping to offset the steep 4.3% drop in the single-family sector, and Kushi believes lower lumber prices and still-high rents may incentivize builders to construct more multifamily units, which are often rented out.
However, others are more cautious: Fitch Ratings released a note Tuesday morning warning that the likelihood of a severe downturn in U.S. housing has climbed as homes have become increasingly unaffordable for Americans.
The firm predicts only a “moderate pullback” in the housing market marked by a mid-single-digit decline in activity (such as starts and new home sales) next year, but it also acknowledged housing activity could fall roughly 30% or more over a multi-year period in a worse-case scenario, pushing home prices down between 10% to 15%.
Crucial Quote
“The whole housing sector is now in retreat,” says Pantheon Macro chief economist Ian Shepherdson, noting the latest data shows multi-family starts have peaked after surging since early 2021 and reaching record levels under construction. Shepherdson predicts the downtrend in construction activity will continue to fall until early 2023, given that mortgage applications have plummeted 30% from a December peak and have yet to find a bottom.
Key Background
Historically high savings rates and low interest rates helped ignite a home-buying frenzy during the pandemic, but the housing market has cooled after the Federal Reserve started raising interest rates this year. The latest data comes just one day after the National Association of Home Builders reported home builder confidence has fallen to the lowest level since May 2020 as ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment. In a statement, NAHB Chief Economist Robert Dietz said the market has entered a “housing recession,” and predicted that single-family housing starts will decline in 2022 for the first time since 2011.
What To Watch For
There’s still more housing data set to be released this week. On Thursday, the National Association of Realtors will report data on existing home sales from last month. On average, economists predict annualized sales fell about 6% to 5.1 million.
Further Reading
New Home Construction Keeps Sinking As Housing Market Demand ‘Quickly’ Dries Up (Forbes)