Workers at a home under construction in Medford, N.J., on May 23.ANDREW KELLY/Reuters
U.S. home building unexpectedly increased in August as rising rents boosted the construction of multi-family housing to the highest level in more than 36 years, but soaring mortgage rates and high prices are undercutting the overall housing market.
The report from the Commerce Department on Tuesday showed permits for future home building plunged to levels last seen during the first wave of the COVID-19 pandemic in the spring of 2020. Home building is also being hobbled by supply chain bottlenecks, which are raising prices for materials.
The Federal Reserve’s aggressive monetary policy tightening has significantly weakened the housing market. In contrast, other sectors of the economy, like the labour market, have shown incredible resilience despite the Fed’s attempts to cool demand.
“Housing construction activity is caught in the crossfire of two opposing forces,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York. “However, construction activity is likely to remain solid for a while as builders work through the backlog even as optimism about new sales plummets.”
Housing starts rebounded 12.2 per cent to a seasonally adjusted annual rate of 1.575 million units last month. Data for July was revised down to a rate of 1.404 million units from the previously reported 1.446 million units.
Economists polled by Reuters had forecast starts would come in at a rate of 1.445 million units. Housing starts dipped 0.1 per cent on a year-on-year basis in August.
Starts for housing projects with five units or more soared 28.6 per cent to a rate 621,000 units, the highest since April 1986.
Multi-family housing construction is being supported by strong demand for rental apartments, with rising borrowing costs pushing home ownership out of the reach of many Americans.
Single-family housing starts, which account for the biggest share of home building, increased 3.4 per cent to a rate of 935,000 units. Single-family home building rose in the Midwest, the densely populated South and the West, but plunged in the Northeast.
The U.S. central bank is expected to raise its policy rate by 75 basis points on Wednesday for the third time in as many policy meetings. Since March, the Fed has lifted that rate from near zero to its current range of 2.25 per cent to 2.50 per cent.
Mortgage rates have risen even higher. The 30-year fixed mortgage rate averaged 6.02 per cent last week, from 5.89 per cent in the prior week, breaking above 6 per cent for the first time since November 2008, according to data from mortgage finance agency Freddie Mac.
Permits for future home building tumbled 10.0 per cent to a rate of 1.517 million units, the lowest level since June 2020. Single-family building permits dropped 3.5 per cent to a rate of 899,000 units, the lowest level since June 2020. Permits for multi-family housing projects declined 18.5 per cent to a rate of 571,000 units.
Residential fixed investment declined at its steepest pace in two years in the second quarter, contributing to the second straight quarterly drop in gross domestic product during that period.
Home building is likely to remain on the back foot for the rest of the year. A survey on Monday showed the National Association of Home Builders/Wells Fargo Housing Market sentiment index fell for the ninth straight month in September.
The survey found almost a quarter of builders reported reducing home prices and more than half were offering incentives to bolster sales, including mortgage rate buy-downs and free amenities.
An outright housing market collapse is, however, unlikely because of an acute shortage of single-family homes for sale.
Though house price inflation has started slowing, there are fewer homes being built because of financial constraints, suggesting the pace could be moderate. That could pose a conundrum for the Fed, which is seeking to bring down house prices by slowing demand for houses.
The number of houses approved for construction that are yet to be started fell 2.7 per cent to 290,000 units. The single-family housing backlog decreased 3.4 per cent to 143,000 units, but the completions rate for this segment increased 0.4 per cent.
The inventory of single-family housing under construction fell 0.4 per cent to a rate of 812,000 million units.