Commentary Directory

Housing Starts Tumble in August Amid Rising Mortgage Rates

Jacob Hess
September 19, 2023

Housing starts crumbled in August to the lowest rate in the post-pandemic period. At just 1.28 million, housing starts fell -11.3% MoM and -14.3% YoY to close the summer, ending the near-term bounce in the construction market after the initial rise in mortgage rates through 2022 and early 2023. The decline came from a sharp move downward in multi-unit starts of -26.3% MoM in August. The start rate of 334,000 is more than -40% below what it was a year ago and is the lowest since August 2020. Single family home starts also contributed to the downtrend but not as much. That segment of construction was down -4.3% YoY but at 941,000, was at the third highest rate this year, outpacing all of the rates seen in Q1 and Q2.


Multi-unit starts had been at an elevated level for the past year and a half as apartment construction ramped up in response to the surge in housing prices and came with a similar up trend in rents. Multi-unit starts averaged 536,000 and 522,000 a month in H2 2022 and H1 2023, much higher than the pre-pandemic average of 419,000 in H2 2019 (which was the highest multi-unit start rate since the 2008-2009 recession ended). So with all that being said, we are looking at a bit of mean reversion here combined with unfavorable financing conditions.

Despite the large move in starts, there was some bullish housing market data to contend with in the report. Building permits issued increased 6.9% MoM and included gains in permits issued for both single (+2.0% MoM) and multi-units (14.8% MoM). However, it is worth nothing that the year-to-date total (Jan-Aug) of permits issued for 2023 is still down -15.8% compared to the same period in 2022. The total number of homes completed increased as well in August, up 5.3% MoM, with a huge increase in the number of multi-unit projects being completed, up 45.8% YoY. Housing completions have become an important data point to look at since low housing inventory became a problem in the pandemic housing boom. As such, completions remain well above the pre-pandemic average, reaching its highest average rate of 1.49 million in the first half of 2023.

The main reason for the sudden plunge in housing starts in August was the recent move upward in mortgage rates. The average 30-year fixed mortgage rate in August was 7.07% which is the highest since December 2021 and just above the previous peak seen about a year ago at 6.90% in October 2022. As a result, we’re about to see the resilience of the housing market be tested over the next two quarters. The market has pushed off its expectations of rate cuts, and the Fed has adopted a clearer guidance on “higher for longer” interest rates. Builder confidence has already started to decline again with the September reading of the NAHB Housing Market Index at 45, a drop of-11 pts in the past two months. Finally, potential homebuyers will be feeling even more constrained than the previous mortgage rate peak as they have less in excess savings, student loan payments no longer in a moratorium, and a weaker labor market. All of these dynamics should lead to a renewed decline in housing demand and thus, residential construction.