Surprising Increase in Housing Construction Initiations for July Despite Elevated Mortgage Rates

June Sees Uptick in New U.S. Home Construction Despite Mortgage Rate Challenges

Amidst the ongoing challenges posed by elevated mortgage rates, the U.S. housing market experienced a modest rebound in June, following a previous month of decline.

New data from the Commerce Department, released on Wednesday, revealed a 3.9% increase in housing starts last month, reaching an annual rate of 1.45 million units. This figure slightly surpassed the expectations of Refinitiv economists, who had forecasted a pace of 1.44 million units.

Simultaneously, applications for building permits, a metric that gauges future construction activity, saw a slight uptick of 0.1% over the month, reaching an annualized rate of 1.44 million units. However, these building permits are down by approximately 13% when compared to the same period last year.

Mike Loewengart, Head of Model Portfolio Construction at Morgan Stanley Global Investment Office, commented on the situation, stating, “The latest figures indicate that easing the constraints of an exceedingly tight housing market is a formidable challenge, even with mortgage rates at their highest levels in over two decades. Much like the labor market, the housing sector has demonstrated a resilience to inflation that the Federal Reserve is striving to address. As the Fed itself has emphasized to the markets, this is going to be a protracted struggle.”

Recent Housing Data Reflects Impact of Mortgage Rate Increase

The release of the data coincided with the surprising drop in the National Association of Home Builders/Wells Fargo Housing Market Index by six points to 50, marking a three-month low. Any reading below 50 indicates negativity.

Leading up to this month, builder sentiment had been on a consistent upward trajectory. The exacerbating inventory shortage, driven by homeowners reluctant to relinquish their pre-pandemic low mortgage rates, prompted potential buyers to turn their attention to new construction.

Nevertheless, the latest data highlights the influence of a recent surge in mortgage rates on this demand.

Alicia Huey, NAHB Chair and a custom home builder and developer from Birmingham, Alabama, commented on the situation, saying, “The rise in mortgage rates and elevated construction costs resulting from a scarcity of construction workers, insufficient buildable lots, and ongoing shortages of distribution transformers have cast a shadow on builder sentiment in August.”

The Federal Reserve’s assertive campaign of interest rate hikes led to mortgage rates skyrocketing to above 7% last year, effectively tempering the once-booming housing market. However, rates have been slow to recede from this nearly two-decade high, which has led numerous prospective buyers to exit the market.

Presently, rates for the popular 30-year fixed mortgage hover around 6.96%, as per Freddie Mac. This stands significantly above the 5.51% rate recorded a year ago and the pre-pandemic average of 3.9%. This marks the highest level since November 2022.