U.S. Housing Starts Plunge 12.4% in July, Undercutting Expectations

U.S. housing starts declined by a substantial 12.4% in July, reaching an annualized rate of 1.239 million units. This figure significantly underperformed the consensus estimate of 1.345 million and marked a 13.5% decrease compared to a year ago. The unexpected drop indicates ongoing headwinds for the housing sector, which has been grappling with elevated mortgage rates and persistent affordability challenges for prospective homebuyers.

The decline in July was broad-based, affecting both single-family and multi-unit segments. Single-family starts decreased by 9.9%, while multi-unit starts saw an even steeper fall of 16.8%. Over the past year, single-family starts have fallen by 15.7%, and multi-unit starts are down 8.9%. Geographically, starts fell across the South, Midwest, and West, with only the Northeast region experiencing an increase. This widespread downturn suggests that the surge in homebuilding observed in June was indeed short-lived, with July's performance registering below even the most pessimistic forecasts.

The broader trend for home construction has been downward since its peak shortly after the Federal Reserve began its series of interest rate hikes in March 2022. Current activity levels are now comparable to those seen in 2019. Homebuilders continue to face a difficult market, with affordability remaining a primary concern. This situation has been exacerbated by surging energy costs, partly attributed to the conflict in Iran, which have contributed to short-term inflationary pressures. Consequently, 30-year mortgage rates have risen approximately 70 basis points since February, now hovering around 6.8%—double the levels observed through much of 2021.

Beyond financing costs, the industry contends with high home prices, stringent local building regulations, difficulties in securing labor due to tighter immigration enforcement, and tariffs on building materials. These factors have historically prompted builders to focus on completing existing projects. However, July data showed home completions also fell, dropping 9.1% to an annualized rate of 1.212 million, reaching their lowest level in six years. A rare positive in the report was a 5.0% increase in new building permits in July, reaching an annualized rate of 1.443 million, surpassing the consensus forecast of 1.375 million. This puts permits 3.1% higher than a year ago, with single-family permits up 1.1% and multi-unit permits up 6.4%. Despite this, the National Association of Home Builders (NAHB) index, a measure of homebuilder sentiment, only slightly edged up to 35 in August from 34 in July, remaining well below 50, signaling that more builders view conditions as poor rather than good for the 28th consecutive month. Until significant improvements in affordability materialize, home construction is expected to remain under pressure.

Key terms

1. Housing Starts: An economic indicator that measures the number of new residential construction projects that have begun during a specific period, providing insight into the health of the housing market.

2. Building Permits: Official authorizations issued by a local government agency that must be obtained before construction or renovation of a building can begin, serving as a forward-looking indicator for future construction activity.

3. Annualized Rate: A method of expressing a statistic over a full year, assuming the current rate of occurrence remains constant. It helps compare data collected over different periods on an equivalent yearly basis.

Source: This article is adapted from First Trust Portfolios' Data Watch commentary on this data release. The original is available at ftportfolios.com.