Tuesday saw mixed indicators for the health of the housing market, with building permits declining but housing starts unexpectedly increasing.
Permits for future homebuilding plunged to a 1.517 million seasonally adjusted annual rate, more than most economists had predicted and the lowest level since just after the coronavirus pandemic took hold more than two years ago. Total building permits, a proxy for future construction, declined 10% in August.
On the other hand, and in a bit of unexpectedly good news for the housing market, total housing starts beat forecasts and increased 12.2% to a 1.575 million unit seasonally adjusted annual rate during August. Housing starts measure the annualized change in the number of new residential buildings that began construction. In July, starts were underwater, falling 9.6%.
“The jump in residential housing construction in August clearly won’t be music to Fed officials’ ears when they sit down at the table today,” said Chris Rupkey, chief economist at FWDBONDS.
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“Housing is the most interest-rate sensitive sector of the economy, and if housing construction is shrugging off the Fed’s front-loaded rate hikes, then that means Fed officials will have to try even harder to slow demand in the economy,” he added.
The Fed has been hiking interest rates in order to rein in the country’s towering inflation and has had to do so more forcefully than most economists had expected. The result is that mortgage rates have risen and caused homes to be more unaffordable, dinging the construction and housing industries.
Mortgage rates ballooned over 6% for the first time since the Great Recession last week. The average 30-year fixed-rate mortgage is now 6.02%, up more than 3.1 percentage points from a year before, according to Freddie Mac, and a 0.13 jump in just the past week.
The Fed has raised rates twice by 75 basis points so far this year. The first hike marked the most aggressive increase since 1994, and it is expected that there will be another jumbo rate hike following the Federal Open Market Committee’s meeting on Wednesday, with some investors even betting that the central bank will go a step further and crank rates up by 100 basis points.
Another prominent factor cutting against the housing market, which is perhaps not talked about as much, is homebuilder confidence, which gauges the market conditions in the single-family construction space.
The National Association of Home Builders announced last month that homebuilder confidence has fallen for eight straight months. The NAHB/Wells Fargo housing market index found that builder confidence in the market for newly built single-family homes plunged 6 percentage points this month to fall into negative territory for the first time since a brief period at the start of the pandemic.
About 1 in 5 of the homebuilders surveyed reported slashing prices in the last month to limit cancellations or increase sales, while nearly 70% blamed rising interest rates for declines in housing demand.
“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” said NAHB Chief Economist Robert Dietz. “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.”
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Those in the housing space will also be watching closely for Wednesday’s latest report on existing home sales, which are expected to show another month of declines as the higher rates hammer the economy.
For July, sales of existing homes fell by 5.9% — the sixth consecutive month of declines, according to the National Association of Realtors. Sales are down a weighty 20.2% from a year ago and have accelerated as the year has gone on.
