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In June, the construction of single-family homes in the U.S. decreased, but there was an increase in permits for future construction, reaching the highest level in 12 months. This rise in permits was influenced by a significant shortage of previously owned houses available for sale, which is driving the demand for new construction.
The drop in housing starts, as reported by the Commerce Department, was a partial correction of the unusually high 18.7% increase seen in May. That surge in May had resulted in a peak for single-family housing projects, reaching the highest point in 11 months. However, builders are facing obstacles in increasing construction due to shortages of materials such as electrical transformer equipment and higher borrowing costs. These challenges resulted in a decline in housing completions last month, and the number of single-family homes currently under construction is at its lowest point in two years.
Mark Palim, deputy chief economist at Fannie Mae in Washington, expressed that despite these difficulties, the level of single-family starts is still strong. He believes that the upward trend in permits indicates that there is likely to be continued strength in the near future. If the economy continues its growth in the upcoming quarters, there is a possibility that housing starts could increase towards an annualized pace of 1 million units. This growth is expected because the demand for housing remains strong, given the ongoing scarcity of existing homes available for sale.
Last month, the construction of single-family homes, which makes up the majority of homebuilding, declined by 7.0% to a seasonally adjusted annual rate of 935,000 units. However, the data for May was revised upward, showing that starts actually reached a rate of 1.005 million units, the highest level since June 2022, rather than the previously reported 997,000 units.
The surge in May's homebuilding activity was likely influenced by abnormally warm and dry weather conditions. During June, there was a decrease in single-family homebuilding in the Northeast, Midwest, and the densely populated South. However, the West experienced a notable increase of 4.6% in single-family homebuilding. Despite this regional variation, the overall supply of single-family housing remains significantly below pre-pandemic levels, which should continue to support construction in this segment.
On the other hand, the multi-family housing segment saw strong growth initially, fuelled by demand for rental accommodations as some potential homebuyers were priced out of the market due to higher mortgage rates. However, this growth seems to be losing momentum. Apartment vacancy rates are on the rise, and there is currently a record-high stock of multi-family housing under construction. These factors may discourage further new construction in the multi-family housing market.
Housing projects with five units or more experienced an 11.6% decline in starts, reaching a rate of 482,000 units, the lowest figure since December. Due to both single- and multi-family homebuilding decreasing, the overall housing starts fell by 8.0% to a rate of 1.434 million units in June. Economists surveyed by Reuters had predicted a decrease to a rate of 1.48 million units.
Nonetheless, it appears that the housing market has likely hit its lowest point after being impacted by the Federal Reserve's aggressive tightening of monetary policies, which led to a recession. According to a survey conducted on Tuesday, the National Association of Home Builders/Wells Fargo Ho W+ X index rose to a 13-month high in July, indicating an improvement in the market, with fewer builders offering incentives to attract buyers.
However, as per data from mortgage finance agency Freddie Mac, the average rate on the widely-used 30-year fixed mortgage is nearing 7%, which could potentially dampen the expected housing market recovery. Residential investment has been declining for eight consecutive quarters, marking the longest stretch since the housing bubble collapse that triggered the Great Recession between 2007 and 2009.
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