July housing starts, a measure of new home construction, plunged 9.6% month-over-month and 8.1% from a year ago, according to the US Census Bureau. After a big drop earlier this spring, housing starts had been holding relatively steady up until last month.
Separately, a survey released Monday found home builder confidence fell for the eighth straight month in August as elevated mortgage rates, ongoing supply chain problems and high home prices continued to make homes less affordable for buyers. The National Association of Home Builders/Wells Fargo Housing Market Index is meant to gauge market conditions and looks at current sales, buyer traffic and the outlook for sales over the next six months.
“Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders,” said Jerry Konter, a NAHB chairman and a home builder and developer from Savannah, Georgia.
With the exception of the spring of 2020 when the pandemic first hit, buyer traffic in August hit its lowest level since April 2014, a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, he said.
Some builders said they are even cutting prices to attract buyers.
Roughly one in five home builders in the survey reported reducing prices in the past month to increase sales or limit cancellations. The median price reduction was 5%.
Housing industry in retreat
The housing numbers on Tuesday were, in a word: “Terrible,” according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.
The plunge in July’s starts were mostly in single-family homes, which were down 10.1% from last month and down 18.5% from last year. This was the fifth straight monthly drop in single-family home starts, said Shepherdson. He added the single-family starts have now dropped by 30% from their November 2020 peak.
And this is likely not the floor, Shepherdson cautioned.
“In short, the whole housing sector is now in retreat,” he said.
Persistently high construction costs, combined with the Federal Reserve’s actions to curb inflation by raising interest rates, have brought on a “housing recession” said Robert Dietz, NAHB’s chief economist.
“The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011,” he said. “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.”
The home building data is another blow to the housing market, said Robert Frick, corporate economist at Navy Federal Credit Union.
High home prices and higher mortgage rates are making potential homebuyers back out of purchase agreements in the highest numbers since the peak-pandemic months of spring 2020.
“What we need is a cooling in home price appreciation, but that’s mainly because the supply of existing homes on the market is too low,” said Frick. “Once inventories increase more, we should see price increases slow down, and we may even see price drops in some overheated markets. Then home building and buying can start to improve.”
Builders focus on multi-family construction
“The decline in multi-family starts could be just the normal month-to-month volatility in apartment buildings,” said Lawrence Yun, chief economist for the National Association of Realtors. “What is important is that multi-family construction is on pace this year to reach the highest activity in more than 30 years.”
The decline in single-family starts to 916,000 annualized units is the lowest since the COVID-19 lockdown months in the spring of 2020 and essentially matches the annual total of 888,000 in 2019 before the pandemic, said Yun.
“Home builders are naturally very cautious about rising unsold inventory during the construction phase,” said Yun. “But those completed homes are finding buyers within three months, which is relatively swift for the new homes market.”