Housing starts plunge

August 16, 2024

New home construction, known as housing starts, plunged 6.8% in July after June starts were revised lower. Starts are now at the lowest level since May 2020, when the world was shut down due to the pandemic. A jump in multifamily construction was not enough to offset the losses from single-family building.

Single-family starts dropped 14.1% to 851,000 units, the lowest since March 2023. Compared to a year ago, starts were 14.8% lower. All regions except the Midwest saw new single-family construction fade. The silver lining was single-family completions, which eked out a 0.5% gain in the month to a 1.05 million total, the largest completion rate since January. The South and West are leading the nation in growth of completions, which helps many supply-challenged markets in those regions.

Multifamily starts for five units or more jumped 11.7% in July to the highest level since February. Starts remain 21.8% lower than a year ago but have been trending slightly higher for the last three months. The Northeast and South are still ramping up multifamily starts. Units currently under construction have fallen below their record highs of one million last year to 870,000 in July. Completions are trending lower, hitting 473,000 in July, 24.4% below the previous month.

Building permits slumped 4% as both single- and multifamily permits lost ground. Only the South saw single-family permits rise, while the Northeast was the only region with higher multifamily permits. Permits are a leading indicator of future construction activity.

Builders remain pessimistic in August, as indicated by the National Association of Home Builders sentiment index, which fell to the lowest level since December 2023. Present sales conditions and traffic from prospective buyers continue to weigh on builders’ outlook. However, builders do see a light at the end of the tunnel, as expectations for rate cuts fuel higher expected sales six months out.

Mortgage rates were hovering close to 7% in early to mid-July but have fallen to 6.5% in mid-August (according to Freddie Mac). This is helping fuel mortgage refinancing for those who bought after rates moved up; refinancing applications shot up to the highest level since May 2022 during the second week of August. Applications for new home purchases, however, have remained near multi-decade lows as households are holding out for lower rates.

Builders are aware that falling mortgage rates will help unlock the pent-up demand that has been sidelined by the higher interest rate environment. The residential construction sector gained another 9,100 payrolls in July for both specialty trade and construction. Wages in the sector continue to outpace overall wages as labor shortages persist, even as activity slows.

The largest challenge for housing is ongoing affordability issues that extend well beyond mortgage rates but a slight drop in rates will help. We are starting to see glimmers of price corrections, especially in the existing market, where time on the market has expanded. Those shifts, coupled with rate cuts by the Federal Reserve, should help unleash some of the pent-up demand from millennials as we move into the fourth and first quarters. There is some hesitation, with buyers waiting for even lower rates and more frequent price cuts. Home builders have led the charge on the latter, trying to build smaller, cheaper homes and offer mortgage buy-downs to tap first-time buyer demand. Existing sellers are still looking for bidding wars, which have abated. 

Lower mortgage rates in August will help spur activity into the fall. Recent inflation data supports the Fed's first rate cut in September. The debate within the Fed is how much to cut. We still expect a one-half percent cut but if it does occur, it will likely be accompanied by a dissent. That would send an important message to bond market participants to temper their expectations for rate cuts. Builders expect to be back chasing first-time buyers later this year and into next.