Home building retreated last month as mortgage rates surged

Image source: Financial Conduct Authority

Rising mortgage rates made it difficult for potential homebuyers in the last few months, and home building slowed in September.

Housing starts

According to the US Census Bureau, housing starts decreased by 8.1% in September from August and by 7.7% in 2021.

After a sharp decline this spring, the housing starts remained stable until July.

Rising mortgage rates have left potential buyers on the sidelines.

However, starts picked up slightly in August when mortgage interest rates fell briefly.

Since then, rates have risen to nearly 7%, their highest point in 20 years.

Meanwhile, building permits rose 1.4% in September compared to August, down 3.2% from a year ago.

Home builder confidence

A survey on Monday found that home builders’ confidence fell for the tenth straight month in October.

High mortgage rates, rising house prices, and continuing supply chain problems have made homes less affordable for buyers.

The National Association of Home Builders/Wells Fargo Housing Market Index measures market conditions.

It also looks at current sales, buyer traffic, and sales prospects for the next six months.

According to homebuilders, traffic from potential new buyers has dropped to its lowest point: the last was in August 2012.

NAHB Chairman Jerry Konter said:

“High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers.”

“This situation is unhealthy and unsustainable.”

Mortgage rates

The Federal Reserve has consistently raised interest rates throughout the year to combat inflation.

As a result, mortgage interest rates have more than doubled since the start of the year.

Robert Dietz, the chief economist at NAHB, said: “This will be the first year since 2011 to see a decline for single-family starts.”

“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 some analysts thought the housing market was more balanced, but he argued homeownership would decline in the months ahead.

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

However, if mortgage rates drop in the next few years after falling inflation, the US could face a severe housing shortage again.

Lawrence Yun, the chief economist of the National Association of Realtors, said::

“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.”

Yun added that home building is not keeping up with the rising population.

Builders and the market

Kelly Mangold of RCLCO Real Estate Consulting said builders are adapting to the market conditions.

The adjustment aims to limit the risk of oversupply, which could lead to a Great Recession-like market crash.

“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.

With mortgage rates high, it’s no surprise that homebuilders are pulling back.

Navy Federal Credit Union corporate economist Robert Frick said there would be no chart reversal in 2022.

“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,” said Frick.

Reference:

New home building retreated in September as rising mortgage rates scare off buyers

Opinions expressed by Portland News contributors are their own.