CNN  — 

Home building pulled back in September, as buyers faced spiking mortgage rates that have made homes increasingly unaffordable.

September housing starts, a measure of new home construction, dropped 8.1% from August, and were down 7.7% 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 July when rising mortgage rates spurred more prospective buyers to sit on the sidelines.

Starts bounced back a bit in August while mortgage rates briefly retreated. But since that time, mortgage rates have been on the rise, inching closer to 7%, hitting a 20-year high.

However building permits, which tracks the number of new housing units granted permits, inched up 1.4% in September from the revised August rate, and were down 3.2% from a year ago.

Separately, a survey released Monday found home builder confidence fell for the tenth straight month in October as elevated mortgage rates, ongoing supply chain problems and 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.

Homebuilders said traffic of prospective new buyers fell to its lowest point since August 2012, excluding the two-month period in the spring of 2020 at the beginning of the pandemic.

“High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” said Jerry Konter, NAHB Chairman. “This situation is unhealthy and unsustainable.”

Little relief in sight

Mortgage rates are more than double what they were at the beginning of the year as the Federal Reserve continued to hike interest rates in an effort to curb inflation.

“This will be the first year since 2011 to see a decline for single-family starts,” said Robert Dietz, NAHB chief economist. “And given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues.”

Dietz said that while some analysts have suggested that the housing market is now more balanced, with prices cooling off and demand softening, he argued the homeownership rate – especially among first-time and lower income buyers – will decline in the months ahead.

“Higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers,” he said.

The problem is that when mortgage rates retreat after inflation is tamed in the coming years, the US could again encounter an acute housing shortage.

“It is understandable for homebuilders to be cautious in light of slowing home sales and some recent data that indicates softening lease signings for new apartments,” said Lawrence Yun, chief economist at the National Association of Realtors.

But, he said, home building is not keeping up with the rising population.

Builders are adjusting in real time to market conditions, in order to limit the risk of an oversupply that could result in a market crash like that which occurred in the Great Recession, said Kelly Mangold, of RCLCO Real Estate Consulting.

“The housing market as a whole has been underbuilt for much of the past decade and a half, and there is still significant demand for housing overall,” she said. But with mortgage rates as high as they are – and likely to go higher – it is no surprise builders are pulling back.

There’s no turnaround in the cards for this year, said Robert Frick, corporate economist at Navy Federal Credit Union.

“We’ll need to wait for 2023 and hope mortgage rates fall and home price increases cool down – with prices in some hot markets even falling slightly – before conditions swing in favor of homebuyers,” he said.