Housing starts fall sharply in July

Single-family housing affordability, with median new-home price above $402,000 and 5.5% mortgage rates, is shifting construction to multifamily projects. (Image: Wells Fargo Economics)

Total U.S. housing starts fell 9.6% during July – 8.1% below July of 2021. Single-family starts dropped 10.1%, multifamily starts fell 8.6% and permits dropped as well.

Upward revisions to June starts took some sting out of July’s sharp decline, but single-family starts have now declined for five consecutive months.

“The pull-back is primarily owed to higher mortgage rates,” said Mark Vitner, senior economist with Wells Fargo Securities, “Which have significantly worsened affordability and caused buyers to head to the sidelines.”

The average 30-year mortgage rate in the U.S. is now around 5.5% – after falling from 6% in June – and 15-year rates are averaging just below 5%, according to Bankrate data. Rates on a 30-year mortgage stayed mostly below 5% from 2009 to this April.

“Mortgage rates staged the fastest and most significant increase in history this year and remain at the highest levels in 13 years,” said Greg McBride, chief financial analyst at Bankrate, quoted by Marketwatch.com. “Mortgage rates have been below 7% for the past 20 years.”

Challenges to new-housing demand are bigger than interest rates, though. With labor and materials supply issues driving the median sales price of new houses sold in June up to $402,400, according to Department of Commerce figures. This turnabout is really about affordability. The median new-home sales price was $329,000 in 2020 and $289,200 in 2015.

What’s coming?

Single-family starts ran at a 916,000-unit seasonally adjusted annual pace during the month. For historical context, July’s pace is still stronger than the average across 2019, before the pandemic ignited a surge in new construction.

“Judging by continued weakness in building permits, however, starts likely have further to fall,” said Mark Vitner.

Total building permits declined 1.3%, a slightly better outcome than the market consensus. Single-family permits dropped 4.3%, the fifth-straight monthly decline.

In another sign that a declining housing market has failed to bottom out, builder confidence in the market for newly built single-family homes fell six points in August to 49, marking the first time since May 2020 that the index fell below the key break-even measure of 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). The August buyer-traffic element of the builder survey was 32, the lowest level since April 2014 with the exception of the early months of the pandemic in spring of 2020.

“The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011,” said Robert Dietz, chief economist for NAHB. “However, as signs grow that the rate of inflation is near peaking, long-term interest rates have stabilized, which will provide some stability for the demand-side of the market in the coming months.”

Shift to multifamily construction

Rising cost of homeownership appears to be bolstering multifamily development. Multifamily starts dropped 8.6% in July to a 530,000-unit pace – new apartment and condo construction does tend to be volatile. But multifamily permits rose 2.8% during July. Over the past three months, multifamily permits are averaging a 705,000-unit pace, the highest average since the mid-1980s.

“Many apartment markets are still remarkably tight,” said Vitner. “Apartment rent growth has lost a bit of steam recently, but rents are still rising at fast pace. Relatively low vacancy rates and rising rents are encouraging developers to move forward with projects.”

Three of the four U.S. regions experienced a decline in residential construction during July. Total housing starts fell 33.8% in the Midwest, 18.7% in the South and 2.7% in the West over the month. The Northeast posted a robust 65.5% improvement, as single-family and multifamily starts rose markedly.

The Producer Price Index for residential construction materials and components rose 16% on a year-over-year basis in July, down from the recent peak rate of growth of 23.7% in March.