Housing starts plummet in July to a 17-month low

Single-family starts have now fallen for five consecutive months as higher mortgage rates have driven buyers to the sidelines while heightened construction material costs have hampered builders. July’s annualized rate of 916,000 single-family starts still remains stout by historical standards, with Wells Fargo economists Mark Vitner, Charlie Dougherty and Patrick Barley noting that the pace is stronger than the full-year average of 2019. But against the landscape of increased construction during the COVID-19 pandemic era, the pace — slowest since June 2020 — is nonetheless disappointing.

“July's swing lower in starts arrives on the heels of a dramatic decline in homebuilder confidence,” the economists wrote in Wells Fargo commentary. “Reported yesterday, the NAHB (National Association of Home Builders) Housing Market Index [which measures builder sentiment] fell to 49 in August, the lowest reading since May 2020, when the pandemic brought activity to a virtual standstill.”

Homebuilder sentiment has now backtracked for eight consecutive months, prompting NAHB chief economist Robert Dietz to confirm that a housing recession is indeed underway. And building on the single-family side is likely to continue cooling. For the first time since June 2020, single-family completions have risen faster than single-family starts, with builders focused on completing existing projects rather than starting new ones.

Single-family permits, meanwhile, dropped by almost 12% year over year and 4.3% from June, marking the fifth consecutive monthly decrease. Notably, while single-family building continues to lag significantly, the picture for multifamily construction is much rosier, even with July’s decline“Multifamily construction remains very strong given the solid demand for rental housing,” Dietz observed. “The number of multifamily 5-plus units currently under construction is up 24.8% year over year.”

“While builders may respond to the decline in affordability and cooling demand in the purchase market by building fewer single-family homes, it’s possible that they will continue to build more rental units,” said Odeta Kushi, deputy chief economist at First American Financial Corp. “Rents remain elevated, which may incentivize building, despite higher financing costs.

“The rental and purchase markets are inextricably tied together – a household chooses to rent or buy a home, substituting one for the other based on market conditions, cost-effectiveness and lifestyle preferences,” Kushi continued. “Would-be homebuyers priced out of the purchase market may add to rental demand.”

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