New US home construction increased in June, though a decline in single-family housing starts to an eight-month low highlights ongoing challenges in the real estate market due to high interest rates.
Multifamily Construction Drives Growth
Total housing starts rose by 3% to an annualized rate of 1.35 million last month, according to government data released Wednesday. This growth was driven by a significant 19.6% surge in multifamily construction. Conversely, starts of single-family homes declined for the fourth consecutive month.
Building permits, which indicate future construction activity, also rose by 3.4% to an annual rate of 1.45 million, spurred by an increase in applications for multifamily projects. However, authorizations for single-family homes fell by 2.3%, reaching the slowest pace in over a year.
The robust pace of single-family construction observed at the end of last year is waning. The report indicated that the number of homes under construction dropped to the lowest level since early 2022, suggesting that builders are aligning inventory more closely with demand.
Declining Housing Demand
“By most accounts, housing demand has been disappointing this spring, leaving builders with an inventory overhang,” noted Stephen Stanley, chief US economist at Santander Capital Markets, in a report. “The recent pullback in single-family starts is a natural response, and it wouldn’t be surprising to see a further decline.”
Prior to the report, the Federal Reserve Bank of Atlanta’s GDPNow forecast anticipated a 2.8% annualized decline in residential investment during the second quarter.
Homebuilder Sentiment
Homebuilder confidence has also waned. The latest index of builder sentiment compiled by the National Association of Home Builders (NAHB) and Wells Fargo has hit a low point for the year. The industry is hopeful that the Federal Reserve will begin reducing interest rates soon, buoyed by a recent inflation report indicating cooling price increases across the economy. Mortgage rates have hovered around 7% for months.
In response, builders have been attempting to boost sales by reducing prices and offering incentives such as mortgage rate buy-downs. According to the NAHB report, 31% of builders reported cutting prices in July, an increase from 29% in June.
Surge in Housing Completions
The Commerce Department’s report also revealed a 10.1% increase in total housing completions, reaching the highest level since 2007, primarily due to a surge in multifamily projects.
Despite the overall positive growth, the housing starts data are volatile. The government report indicated a 90% confidence that the monthly change ranged from a 7.5% decline to a 13.5% gain, underscoring the uncertainty in the market.
While multifamily construction is buoying the market, the persistent decline in single-family starts and builder sentiment points to a sector still grappling with high interest rates and subdued demand.
