Home building bounced back a bit last month even though demand for new homes among buyers had started to cool off and the cost of building supplies remained high.
August housing starts, a measure of new home construction, jumped 12.2% from July, and were down 0.1% from a year ago, according to the US Census Bureau. After a big drop earlier this spring, housing starts had been holding relatively steady up until last month.
This latest increase in new housing starts is a good thing for the housing market because inventory has been so tight. The shortage in supply has played a big factor in pushing home prices higher amid soaring demand, part of why home prices were climbing.
“The latest month’s increase is implying that builders still see profit opportunities even as they concede on prices,” said Lawrence Yun, chief economist at National Association of Realtors.
The majority of the gain in housing starts in August was in multifamily properties, buildings with five units or more, which were up nearly 30% from July. Single family starts rose modestly, up 3.4% from a month ago.
Still there are signs that the housing market remains volatile and builders remain cautious.
Building permits in August plunged 10% from the revised July rate, and were down 14.4% from a year ago.
Also, a survey released Monday found home builder confidence fell in September for the ninth-straight month to the lowest point since 2014 (with the exception of 2020).
The sentiment dropped as higher mortgage rates, continuing supply chain problems and persistently high home prices continued to make homes less affordable for buyers. The National Association of Home Builders/Wells Fargo Housing Market Index is meant to gauge market conditions and looks at current sales, buyer traffic and the outlook for sales over the next six months.
“Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households,” said Jerry Konter, NAHB Chairman.
Builder sentiment has declined every month in 2022, and the slow down shows no signs of abating, said Robert Dietz, NAHB Chief Economist.
“Builders continue to grapple with elevated construction costs and an aggressive monetary policy from the Federal Reserve that helped push mortgage rates above 6% last week, the highest level since 2008,” he said.
But, according to the report, there was a meager upside for buyers: 24% of builders reported that they had reduced home prices in September, up from 19% last month.
“In this soft market, more than half of the builders in our survey reported using incentives to bolster sales, including mortgage rate buy downs, free amenities and price reductions,” said Dietz.
But the typical cycle of homeowners “moving up” from a starter home into a higher priced new construction home may be stalling as rising mortgage rates make buying less affordable, said Kelly Mangold of RCLCO Real Estate Consulting.
“Many potential ‘move-up’ buyers who would be likely candidates for high-priced new construction homes may also be weighing the benefits of remaining in their current home, where they likely have a mortgage rate less than half of today’s going rate – all factors that are contributing to a decline in housing mobility,” she said.
And many first-time buyers are deciding to remain renters as well.
Multifamily building in August had its best monthly performance in 35 years, as rents remain at record highs in many parts of the country.
“Apartment demand has been strong, with rents rising at a historically high pace,” said Yun. “Those consumers unable to qualify for a mortgage at higher interest rates are renewing their rental leases. Job creation is also boosting the rental demand.”