Single-Family Starts and Permits Fell Again in July

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Total housing starts fell to a 1.446 million annual rate in July from a 1.599 million pace in June, a 9.6 percent drop. From a year ago, total starts are down 8.1 percent. Total housing permits also fell in July, posting a 1.3 percent drop to 1.674 million versus 1.696 million in June. Total permits are still up 1.1 percent from the July 2021 level.

Starts in the dominant single-family segment posted a rate of 916,000 in July versus 1.019 million in June, a drop of 10.1 percent. That is the slowest pace and first month under one million since June 2020. Starts are down 18.5 percent from a year ago (see first chart). Single-family permits fell 4.3 percent to 928,000 versus 970,000 in June, first second month in a row under one million and the slowest pace since June 2020 (see first chart).

Starts of multifamily structures with five or more units decreased 10.0 percent to 514,000 but are up 17.4 percent over the past year, while starts for the two- to four-family-unit segment jumped 77.8 percent to a 16,000-unit pace versus 9,000 in June. Total multifamily starts were off 8.6 percent to 530,000 in July, showing a gain of 18.0 percent from a year ago (see first chart).

However, multifamily permits for the 5-or-more group rose 2.5 percent to 693,000 while permits for the two-to-four-unit category increased 6.0 percent to 53,000. Total multifamily permits were 746,000, up 2.8 percent for the month and up 23.5 percent from a year ago (see first chart).

Meanwhile, the National Association of Home Builders’ Housing Market Index, a measure of homebuilder sentiment, fell again in August, coming in at 49 versus 55 in July. That is the eighth consecutive drop and the first month below the neutral 50 threshold since May 2020. The index is down sharply from recent highs of 84 in December 2021 and 90 in November 2020 (see second chart).

According to the report, “Builder confidence fell for the eighth straight month in August as elevated interest rates, ongoing supply chain problems and high home prices continue to exacerbate housing affordability challenges.”  The report adds, “Roughly one-in-five (19%) home builders in the HMI survey reported reducing prices in the past month to increase sales or limit cancellations. The median price reduction was 5% for those reporting using such incentives.”

All three components of the Housing Market Index fell again in August. The expected single-family sales index dropped to 47 from 49 in the prior month, the current single-family sales index was down to 57 from 64 in July, and the traffic of prospective buyers index sank again, hitting 32 from 37 in the prior month (see second chart).

Input costs are still a concern for builders though lumber prices have declined from recent highs. Lumber recently traded around $593 per 1,000 board feet in mid-August, down from peaks around $1,700 in May 2021 and $1,500 in early March 2022 (see third chart).

Mortgage rates have eased back recently, with the rate on a 30-year fixed rate mortgage coming in at 5.22 percent in mid-August versus 5.80 percent in late June. However, rates are still about double the lows in early 2021 (see fourth chart).

While the implementation of permanent remote working arrangements for some employees may have been providing continued support for housing demand, record-high home prices combined with the surge in mortgage rates and falling consumer attitudes are working to weaken demand. Pressure on housing demand combined with elevated input costs is sending homebuilder sentiment plunging. The outlook for housing is unfavorable.