New Construction Falls in June as Higher Prices, Mortgage Rates Hit Housing Market | Economy

New home construction slumped in June as both housing permits and new home starts fell from May levels, the Census Bureau and the Department of Housing and Urban Development reported on Tuesday.

Permits came in at 1.685 million, down 0.6% from the revised May reading of 1.695 million while starts fell 2% to 1.559 million, compared to May’s revised 1.591 million.

“Housing starts decreased in June for the third month in a row, as the for-sale market cools in reaction to evolving market conditions,” said Kelly Mangold, a principal at RCLCO real estate consulting. “Rising mortgage rates continue to impact this industry, and the availability of labor and materials continues to slow the rate of new starts.”

“There is a lot of uncertainty around future conditions, and the lingering possibility of a recession has caused both builders and buyers to take a temporary ‘pause’ as they adjust to the evolving market,” she added.

Housing has been among the strongest sectors of the economy since the coronavirus struck America in early 2020. But, as with other areas of the economy that are now slowing, housing is showing signs of a downturn.

“Home building is a leading economic and housing indicator, and the decline in homebuilder confidence suggests that housing, and particularly the new home market, is slowing down,” Odeta Kushi, deputy chief economist at First American, said ahead of the report.

“Inflation is hurting consumer confidence and purchasing power while higher mortgage rates alongside high home prices dampen affordability,” she added. “The result? A reduction in buyer traffic and sales. And there’s another headwind for builders: buyers now have more choice.”

After two years of a red hot market, housing is now facing the combined effects of elevated prices and higher mortgage rates. Although the inventory of homes for sale has improved, affordability has decreased.

The average rate on the 30-year fixed mortgage has nearly doubled since January and is now hovering just below 6% – this statistic alone shows why homebuilder sentiment and housing starts continue to decline,” said David Auerbach, managing director at Armada ETF Advisors.

The downturn in housing, along with other signs of economic slowdown, raises the probability of a recession as the Federal Reserve tightens monetary policy to curb inflation.

The Fed meets next week and is widely expected to raise interest rates by 75 basis points or more. Recent data has shown that inflation accelerated in June, breaching the 9% annual rate. It’s a delicate balancing act for the central bank as it tries to slow inflation while also keeping the economy out of a recession.

Wells Fargo economists wrote on Tuesday morning that “signs of a broad-based economic slowdown have mounted. Small business optimism has faltered, real consumer spending has weakened, housing activity has stalled and business investment is downshifting in response.”

“The sustained loss in momentum signals economic agents have lost confidence in the economy, which is in line with our barely positive GDP growth forecast of 0.2% (annualized) for Q2-2022,” Wells Fargo added.