Housing construction surprises with August rebound — but permits spell another downturn

Residential construction logged an unexpected rebound in August, with housing starts surging 12.2% month over month to a seasonally adjusted annual rate of 1.58 million units, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

Starts handily beat expectations, with a Reuters poll of economists projecting a rate of 1.45 million units. Surprisingly, both multifamily and single-family starts rose during the month, even as the housing market grapples with a slowdown brought about by the uncertain economy and rising mortgage rate environment.

Single-family starts halted a five-month streak of declines, growing by 3.4% in August, which was likely due to some improvements in the availability of building materials. Single-family construction, however, remains low compared to recent standards: On a year-to-date basis, single-family starts are down 4%.

“Single-family production is running at a weakened pace due to elevated mortgage rates and high construction costs that have led to a major slowing of the housing market and exacerbated housing affordability,” said Jerry Konter, chairman of the National Association of Home Builders (NAHB). “The slowdown in the single-family market has been reflected in our builder surveys, which have posted declines every month in 2022.”

“Today’s housing starts report is more evidence that the housing recession is deepening for the single-family market, with the pace below 1 million for the last two months,” added Jing Fu, the NAHB’s director of forecasting and analysis. “Expected additional tightening of monetary policy from the Federal Reserve, falling builder sentiment and a 15.3% year-over-year decline in single-family permits points to further weakening for the housing sector.

“The one bright spot is multifamily construction, which remains very strong given solid demand for rental housing.”

Indeed, multifamily starts bounded 28% in August, more than offsetting the 11% drop posted by the segment in July. Year over year, multifamily starts are now up 33.1%, continuing a pattern of strength fueled by low apartment vacancy rates and sidelined homebuyers who remain in the renter pool.

As encouraging as the August data is, the construction rebound may be short-lived. Total building permits fell by 10% in August, with single-family permits down 3.5% and multifamily plummeting by 17.9%. Permitting is a solid indicator of new-home supply moving forward, so the August backtrack is a clear sign that builders are still slowing production in the face of ongoing material cost issues and tempered demand.

“The decline in permits shows that builders are responding to the decline in affordability and cooling demand in the purchase market by building fewer single-family homes,” said Odeta Kushi, deputy chief economist at First American Financial Corp.

“A slowdown in new construction is concerning in the long run because there remains a structural and long-term national shortage in the housing market,” Kushi added. “Millennials aging into their prime homebuying years and a lack of existing-home inventory, as rate-locked-in homeowners see little incentive to list their homes for sale, mean that new-home construction is essential in meeting future shelter demand.”


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