US home building cooled in June, dropping 8% from May’s surprising surge, which came as low inventory in the existing home market continued to boost interest in new homes.
Housing starts, a measure of new home construction, dropped to a seasonally adjusted annual rate of 1.43 million, under economists’ expectations for 1.48 million, according to data released Wednesday by the Census Bureau.
The number of units was down 8.1% from a year ago.
“Despite May’s breakout starts and permits data, June’s numbers showed homebuilders are still struggling with high mortgage rates, high construction costs and limited land to build on,” said Robert Frick, corporate economist with Navy Federal Credit Union. “More new houses were never going to save a housing market marked by low inventory, expensive homes and high rates, but it’s been helping this year, especially as the median price for a new home has fallen.”
Single‐family housing starts, which account for most of the building, fell 7% in June from the revised May figure, at a seasonally adjusted annual rate of 935,000. Multi-family starts, with five units or more, went down by 11.6% to 482,000.
Building permits, which track the number of new housing units granted permits, also fell in June, to a seasonally adjusted annual rate of 1.44 million. Permits were down 3.7% from the revised May rate, and were down 15.3% from a year ago.
Builders are benefiting from the lack of existing homes for sale as owners hunker down, but higher mortgage rates pose a threat, said Odeta Kushi, deputy chief economist at First American Financial Corporation.
“Reduced affordability alongside ongoing supply-side challenges and tighter lending standards for acquisition, development and construction loans could throttle builder momentum.”
The average 30-year, fixed-rate mortgage was 6.67% in the week ending June 22, according to Freddie Mac. Three weeks later, rates had drifted to about 7%. Holding household income constant, the increase in mortgage rates reduced home-buying power by approximately $10,000, Kushi said.
“There remains pent-up demand in the housing market, but higher rates put a strain on affordability,” said Kushi.
Builders remain ‘cautiously optimistic’
Builder confidence remains high despite concerns about rising rates.
A separate survey released on Tuesday from the National Association of Home Builders revealed that the lack of inventory in the existing home market — as current homeowners hunker down with their ultra-low interest rates — continues to boost home builder sentiment even as their costs remain high.
The National Association of Home Builders/Wells Fargo Housing Market Index gauges market conditions and looks at current sales, buyer traffic and the outlook for sales of new construction homes over the next six months.
The index rose again in June, marking the seventh-straight month that builder confidence has increased, and marks the highest level since June of last year.
“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers,” said Alicia Huey, NAHB Chairman. “At the same time, builders are troubled over rising mortgage rates approaching 7% and continue to grapple with supply-side challenges, including ongoing scarcity of electrical transformer equipment and growing concerns about lot availability.”
Considering ‘shelter’ inflation accounts for roughly 40% of the Consumer Price Index, the best way to ease this largest source of inflationary pressure is to build additional for-rent and for-sale housing, said Robert Dietz, NAHB Chief Economist.
“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop-and-start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” said Dietz.
Builders are more reluctant to budget on prices than they were earlier this year.
The July survey of builders also revealed that even though interest rates remain elevated, builders’ use of sales incentives has declined, as the market has firmed and resale inventory options remain limited. Only 22% of builders reported cutting prices in July. This is down from 25% in June and 27% in May.
