Commentary Directory

In August, housing starts in the U.S. plummeted to their lowest post-pandemic rate at 1.28 million, marking an -11.3% MoM and -14.3% YoY decline, largely driven by a significant drop in multi-unit starts. This decline contrasts with the previously elevated levels of multi-unit starts, which had surged due to rising housing prices and rents. However, despite this downturn, the report highlighted some positive signs: building permits rose by 6.9% MoM, and housing completions, crucial in addressing the low inventory issue from the pandemic boom, remained above pre-pandemic averages, with multi-unit completions seeing a significant 45.8% YoY increase.

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.