Growth in US single-family home construction, rising supply is a near-term constraint

Single-family housing starts jumped 15.8% in August
Permits for future single-family buildings increased by 2.8%

WASHINGTON, Sept 18 (Reuters) – U.S. single-family homebuilding rebounded sharply in August, but a moderate increase in building permits suggested the pace was unlikely to be sustained amid a growing supply of new homes on the market.

The jump in single-family housing reported by the U.S. Commerce Department on Wednesday likely reflected the fading drag from Hurricane Beryl, which depressed homebuilding in the South. With the Federal Reserve cutting interest rates by 50 basis points on Wednesday, the first rate cut since 2020, homebuilders may also face a challenge from increasing the inventory of previously owned homes for sale.

Most homeowners have mortgage rates below 4%, and high rates prevent many from listing their homes. So-called “rate lock” starves the housing market of supply, creating an opportunity for builders.

“A renewed slowdown in single-family construction activity is likely in the coming months as homebuilders appear to have reacted too aggressively to a slight uptick in new home sales in 2023, and now have excessive levels of inventory left,” Oliver said. Allen, senior US economist at Pantheon Macroeconomics. “Lower mortgage rates will help boost demand for new homes at the margin.”

Single-family housing starts, which account for most home construction, rose 15.8% at a seasonally adjusted annual rate of 992,000 units last month, the Commerce Department's Census Bureau said. Single family starts rose 5.2% from a year earlier.

Future construction permits for single-family housing rose 2.8% to 967,000 units. They were 0.5% lower than a year earlier.

Single-family home building fell for five consecutive months after a spring mortgage rate hike curbed home sales, leading to an oversupply of newly constructed homes.

A National Association of Home Builders survey on Tuesday showed homebuilder sentiment improved slightly in September after four straight months of sliding, but noted that “builders face a race to increase existing home inventory in many markets as mortgage rate 'lock-in' effects soften.” Will. With low mortgage rates.”

Mortgage rates fell back to 1-1/2-year lows. New housing supply is near levels last seen in early 2008, while monthly supply is above the 2018-2019 average.

Supply growth, however, has been uneven, and affordability remains a constraint that likely won't ease with lower mortgage rates.

Mortgage finance agency Fannie Mae's Economic and Strategic Research Group noted on Wednesday that most of the increase in homes for sale occurred in the Sun Belt and Mountain West regions, which also experienced the strongest growth in home prices in recent years. New home construction.

The group said this created both a large relative affordability push in these states and greater competition for existing home sales stemming from new construction.

“While mortgage rates have declined significantly in recent weeks, we have not seen evidence of a corresponding increase in loan-application activity, or an improvement in consumer home buying sentiment,” said Doug Duncan, Fannie Mae's chief economist.

“We expect the primary limitation of housing activity to remain within affordability for the foreseeable future,” Duncan added.

Single-family starts volved 18.9% in the densely populated South, where activity slowed due to Hurricane Beryl in July. Starts grew 47.4% in the Northeast and 11.6% in the Midwest, considered the most affordable region. Homebuilding in the West rose 2.8%.

Wall Street stocks extended gains on the US central bank's rate decision. The dollar fell against a basket of currencies. US Treasury yields fell on the announcement.

Housing drags on the economy

Starts for housing projects with five units or more fell 6.7% in August to 333,000 units. Overall housing starts jumped 9.6% to 1.356 million units. Economists polled by Reuters had forecast an increase of 1.310 million units. Housing starts rose 3.9% from a year ago.

Multi-family building permits rose 8.4% to 451,000 units. Building permits increased overall by 4.9% to 1.475 million units. They are down 6.5% from a year ago.

Economists had expected the housing market to be a drag on economic growth in the third quarter and extend the decline into the final three months of the year.

“In the single-family market, while sales have held up reasonably well, inventories have risen significantly,” said JPMorgan economist Abiel Reinhart. “Manufacturers may prefer to keep starts lower for a while to offset this inventory. Lower mortgage rates may also help reduce single-family inventory through stronger sales. But there is less room for sales to improve in the new home market.”

The number of homes approved for construction that have not yet started rose 1.4% last month to 285,000 units. Single-family homebuilding backlogs rose 2.8% to 148,000 units, the highest level since April 2020. The completion rate for that housing category fell 5.6% to 1.029 million units.

Overall housing completions increased by 9.2% to 1.788 million units. The number of housing units under construction fell 1.9% to 1.509 million units, the lowest level since November 2021.

Inventories of single-family housing under construction fell 0.3% to 642,000 units.

“New construction projects probably won't reach the levels of a few years ago,” said Veronica Clark, an economist at Citigroup. “This means that as units under construction continue to be completed and are not being offset with an equal number of new construction projects, total construction will decline.”

Reporting by Lucia Muticani; Editing by Chizu Nomiyama and Will Dunham

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