New home construction continues to sink as housing market demand ‘rapidly’ dries up

Topline

New housing starts unexpectedly plunged more than economists had expected in June as homebuilders grappled with the effects of rising interest rates dampening demand for new homes, according to data released on Tuesday, adding to signs of a sharp turnaround in the booming housing market.

Highlights

The number of housing starts, or new homes that have begun construction, fell 2% to around 1.56 million last month despite average economic projections calling for a 1.4% increase, the Census Bureau.

Building permits were slightly better than expected at less than 1.7 million, but fell from May and are down from around 1.8 million in April.

In comments emailed after the release, LPL Financial chief economist Jeffrey Roach said housing starts fell because demand was “drying up quickly” due to rising building costs. borrowing as the Federal Reserve hiked interest rates, though he expects homebuilding activity to hold up despite the bleak outlook. .

Pantheon Macro chief economist Ian Shepherdson sounded less optimistic, noting that single-family housing starts and permits both fell 8% in their fourth consecutive month of declines and noting that construction activity is lagging behind sales, which in turn are lagging mortgage applications.

Mortgage applications have collapsed by more than 25% this year, he adds, suggesting that construction of single-family dwellings “needs to drop by [another] around 20% over the next few months” to be more in line with demand.

The latest data comes a day after the National Association of Home Builders reported the second-worst monthly decline in homebuilder confidence on record, due to ongoing production bottlenecks and rising inflation. high which pushed the cost beyond its market value in some cases.

Key Context

Historically high savings rates and government stimulus helped spark a home-buying spree during the pandemic, but signs of a slowdown quickly emerged as the Fed begins its cycle of interest rate hikes most aggressive in two decades to rein in high inflation. Mortgages soared from $2.3 trillion in 2019 to over $4 trillion in 2020 and 2021, but demand has since fallen to its lowest level in more than two decades. On Friday, real estate broker Redfin reported that the number of homes for sale nationwide had seen its first annual increase since July 2019 last month.

crucial quote

“Homebuilders must adapt quickly to a world with fewer buyers and far more competition from private sellers of existing homes, whose listings jumped by a third in the three months to May. and many more to come,” says Shepherdson. “In short, housing construction is far from at an all-time low.”

To monitor

There is still a list of housing data to be released over the next week. On Wednesday, the National Association of Realtors releases monthly existing home sales data, and next Tuesday, S&P releases home price data.

Further reading

Buying a home is about to get even harder (Forbes)

Housing market slump intensifies: Homebuilders halt construction as confidence plunges to two-year low (Forbes)

Housing market ‘in free fall’ as new construction slumps – here’s when ‘reset’ could drive prices down (Forbes)