August housing starts fell, pushed by high mortgage rates

September 19, 2023

Housing starts, another name for new home construction, tumbled 11.3% in August after being revised lower in July. Both single and multifamily starts lost ground in the month. Mortgage rates above 7% for the entire month translated to diminished demand, while heat waves across the country impacted building activity; extreme heat is taking a bite out of productivity.

Single-family starts fell 4.3% in August but are still 2.4% higher than a year ago. Single-family starts cratered late 2022 into early 2023 when rising mortgage rates started to weigh on demand. Builders have been more adaptive to market conditions than home sellers, offering larger discounts and mortgage rate buydowns to get buyers in the door. That has led to a sharp increase in the share of newly built homes available for sale compared to the resale market. The share of builders cutting prices in September jumped from the prior month; the question is how much more can builders afford to offer as rising mortgage rates squeeze margins?

All regions except the South experienced losses in single-family starts. The South, the largest housing market, saw starts soar 8.1% compared to last month and 14.6% compared to last year. Strong net migration and job growth have made the region an outlier in construction activity as builders attempt to keep up with robust demand for both houses and apartments.

Multifamily starts plunged 26.3% in August and are now almost half of what they were a year ago. Starts now sit at 342,000 units, the lowest level of activity since May of 2020 at the height of lockdowns. Construction activity for multifamily has been quite robust over the last few quarters, even when mortgage rates started to climb. More demand from millennials and those priced out of purchasing a home have pushed up rents in many hot markets, particularly the South. A record backlog of new multifamily units is starting to come on line, bringing down rents with the increased supply. The backlog of units currently under construction has fallen for the first time in August after rising for 29 consecutive months, but remains near its all-time high of over a million units.

Builders have pivoted to single-family construction with more multifamily projects completed. Permits for single-family housing jumped 2% in August to the highest level since May 2022. That will translate to more newly built single-family homes coming on line next year. Declining starts and rising permits signal that builders are betting on more demand next year.

Multifamily permits for buildings with five units or more soared 14.8% in August after falling over the past two months. Permits remain 17.7% lower than a year ago, but momentum is picking up. All regions saw permits rise in August, with the West leading the gains.

Separately, home builder sentiment, as measured by the National Association of Home Builders, hit contractionary territory for the first time in seven months in September. They expect more weakness in demand this year as high rates and tight supply sideline buyers.

Bottom Line:

Housing construction is in a slump due to a mix of decreased demand and scorching summer heat. Builders are feeling pessimistic about future sales conditions while mortgage rates sit above 7%. The expectation is for demand to be revived once rates come down next year and permits begin to translate to more construction. Record supplies of apartments coming on line this year and next will translate to cooling of rents, which will show up in inflation data with about a one-year lag. With shelter now the primary driver of core inflation, that is welcome news for the Federal Reserve, which is expected to pause rate hikes at tomorrow’s policy meeting.