Decline in permits hints at possible slowdown in construction activity, experts say
Housing starts, permits, and completions all increased in July, continuing a home construction boom fuelled by pent-up consumer demand.
The Census Bureau reported Wednesday a 3.9% month-over-month gain in housing starts, which rose to an annualized rate of 1.45 million in July.
“New home starts increased in July after a decline in June, even as the Fed raised interest rates mid-month, bringing mortgage rates back to levels close to their late 2022 peak,” said Kelly Mangold, principal at RCLCO Real Estate Consulting.
“Builder sentiment has shown that higher mortgage rates are contributing to a decline in buyer traffic, and rates need to stabilize to prevent the housing market from slowing,” added Alicia Huey, chairman of the National Association of Home Builders (NAHB).
While the combination of high-interest rates, high pricing, and limited inventory is likely to continue to plague the housing market, First American deputy chief economist Odeta Kushi highlighted that demand remained strong, especially among millennials.
“Demographic tailwinds from millennials continuing to age into their prime home-buying years and a lack of existing-home inventory means that new-home construction is essential in meeting shelter demand,” Kushi said. “Higher mortgage rates threaten affordability, and builder supply-side challenges remain, but the housing market remains fundamentally underbuilt, and existing homeowners aren’t moving. While builders can’t make existing homeowners move, they can add more new homes to the housing stock.”
“The lack of resale inventory continues to benefit the new home market, and motivated buyers may find a good deal as prices stagnate and large builders who are able to offer mortgage buydowns are able to offer buyers a much more competitive offer than is available in the resale market,” Mangold added.
Within the overall figure, single-family starts rose 6.7% to a 983,000 seasonally adjusted annual rate – 9.5% higher than last year. The multifamily sector saw a 1.7% drop in construction, down to an annualized 460,000 pace.
But NerdWallet home expert Holden Lewis said, “Record numbers of apartments are under construction. A seasonally adjusted 986,000 multifamily units are being built, most of which are destined to be apartment rentals when they are completed. These numbers surpass the surge in apartment construction in the early 1970s when baby boomers were clamoring for places to live.”
Permits, a leading indicator of future starts, edged up 0.6% month over month, and completions rose 1.3% compared with June, bringing more supply to the housing stock.
However, permits were down 13% from a year ago, indicating that builders are slowing construction activity as housing costs rise.
“In fact, multifamily permits are at their lowest three-month moving average since December 2020, another sign that the market is cooling,” said Danushka Nanayakkara-Skillington, assistant vice president for forecasting and analysis at NAHB. “In order to bring down shelter inflation, which accounted for 90% of the overall inflation rate last month, we need to enact policies that will allow builders to boost the nation’s housing supply.”
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