US Single-Family Homebuilding Rebounds in September
Increased Demand for New Construction
U.S. single-family homebuilding experienced a rebound in September, driven by the high demand for new construction amidst a severe housing shortage. However, the housing market recovery may face challenges due to the soaring mortgage rates, which are at their highest level in almost 23 years.
Decline in Mortgage Applications
Last week, applications for loans to purchase a home plummeted to levels not seen since 1995, as indicated by recent data. Although housing starts saw a partial recovery from the decline in August, it is important to note that the rebound in homebuilding largely reflects permits that were approved several months ago when mortgage rates were below 7%. Furthermore, a recent survey revealed that confidence among single-family homebuilders has declined to a nine-month low in October, with builders reporting lower levels of traffic.
Potential Impact of Mortgage Rates
While single-family construction activity is expected to increase in the short-term with rising permits, there is a concern that mortgage rates could hinder new construction for home purchases. Conrad DeQuadros, senior economic advisor at Brean Capital, suggests that mortgage rates may eventually limit new construction activity. Despite the rebound in September, single-family housing starts rose by 3.2% to a seasonally adjusted annual rate of 963,000 units. However, starts in the Northeast experienced a significant decline of 19.0%.
Impact of Mortgage Rate Increase
Prior to the increase in mortgage rates, the housing market had shown signs of stabilization. However, the rate on the popular 30-year fixed mortgage surged above 7% in August, causing concern. The Mortgage Bankers Association reported that the average contract interest rate on a 30-year fixed-rate mortgage reached its highest level since November 2000, rising to 7.70%. The rise in mortgage rates is closely tied to the increase in the yield on the 10-year Treasury note, which has reached a 16-year high. These increases are largely due to expectations that the Federal Reserve will maintain higher interest rates in response to the strong economy.
Residential Investment and the Housing Market
Residential investment has declined for nine consecutive quarters, marking the longest stretch since the burst of the housing market bubble in 2008. The decline in residential investment likely extended into the third quarter, although overall gross domestic product (GDP) growth is expected to be the fastest since late 2021. This growth is mainly attributed to a tight labor market that supports consumer spending.
Implications for the Housing Market
The decline in housing starts and building permits for multi-family projects raises concerns about the future of homebuilding. While permits for future construction of single-family homes increased by 1.8% to a rate of 965,000 units, economists caution against excessive optimism due to the impact of soaring mortgage rates and declining builder sentiment. The decline in multi-family building permits suggests limited potential for new multi-family housing projects. However, the economist Colin Johanson suggests that the backlog of inventory in the under-construction pipeline could alleviate price pressures once it enters the market.
Conclusion
In summary, the rebound in U.S. single-family homebuilding in September reflects increased demand for new construction. However, the housing market recovery may face challenges due to the highest mortgage rates in nearly 23 years. It is important to monitor the impact of these rates on new construction activity and the overall housing market.
