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Low inventory boosts starts

Builder sentiment weakest in West and Midwest.


August 15, 2023

New home construction, also called housing starts, came in slightly above expectations for July while June data was revised lower. Starts expanded by 3.9% in the month and 5.9% compared to a year ago. Significantly low inventory in the resale market has provided a boost to builders, even at a time when interest rates remain high.

Single-family starts popped 6.7% to almost one million units in July. All of that activity occurred in the Midwest and West. Home buyers have been turning to the newly built housing market for more options. According to the Mortgage Bankers Association, mortgage applications for a newly built home were up 35% from a year ago in July. The share of those applications coming from FHA was almost one quarter, the highest share since May of 2020. FHA loans are geared toward first-time and low-income buyers as they offer low down payment options.

Overall mortgage applications to purchase a home continued their downward march in August, as mortgage rates inched close to the highs last seen in October of 2022, according to Freddie Mac. The last time mortgage rates hit above 7%, they quickly retreated, which enabled sales to rebound after bottoming out about three months later. Sales of newly built housing were largely unphased, as builders quickly ramped up the use of price cuts and mortgage rate buydowns. In August, builders are increasingly using these strategies, with the discounts needed to move properties increasing.

Multifamily housing starts for buildings of five units or more were flat during the month and only 0.4% higher than a year ago. Strong household formation has been a boon for the multifamily sector. Rents have been falling in many parts of the country as more apartments come on line, while home prices, especially at the lower end, remain stubbornly high. Buyers pushed to the sidelines are turning to renting.

Housing permits, which indicate future building activity, were essentially flat on the month and down 13% from a year ago. The drag has come entirely from multifamily permits, as builders are still working through record-high backlogs of multifamily buildings of five units or more. Single-family permits inched up 0.6% in the month and are at the highest level since June of 2022.

Separately, home builder sentiment, as measured by the National Association of Home Builders, fell in August but remains in positive territory.  A slowdown in foot traffic and a drop in sales expectations accounted for the deterioration. Rising mortgage rates are taking a bite out of would-be buyers' wallets. Builder sentiment was the worst in the West (where median home prices are far higher than the nation's median) and the Midwest.

The toll of the recent surge in rates works its way through to buyer demand in late summer and early fall.

Bottom Line:

Housing has traditionally been the most interest rate sensitive sector and has slumped since mortgage rates started to rise in 2022. The pent-up demand among millennials, who are reaching prime home buying years, has kept demand above the level the market can supply at these mortgage rates. Those shifts, coupled with builders' willingness and ability to offer discounts, have buoyed construction activity in 2023. There are limits to that process, which we are expecting to see as the toll of the recent surge in rates works its way through to buyer demand in late summer and early fall. 

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Meet our team

Image of Yelena Maleyev
Yelena Maleyev
Senior Economist, KPMG Economics, KPMG US

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