U.S. Housing Starts Jump in July as Permit Outlook Dims

A surprising surge in new home construction provided a jolt to the U.S. housing market in July, even as builders grew increasingly pessimistic about the near future. According to the latest joint report from the U.S. Census Bureau and the Department of Housing and Urban Development, housing starts jumped 5.2% last month to a seasonally adjusted annual rate of 1.428 million units. This represents the strongest pace of groundbreaking activity in five months, offering a complex picture of an industry grappling with high borrowing costs and fluctuating demand.

Multi-Family Construction Drives Housing Starts Increase

The overall boost in housing starts was primarily fueled by a significant uptick in the construction of apartment buildings and other multi-unit projects. Starts for buildings with five units or more soared by 11.6% in July, reaching their highest level since May 2023. This robust activity in the multi-family sector indicates a continued strong demand for rental properties, which remains high as many potential homebuyers are still priced out of the for-sale market due to elevated mortgage rates.

Simultaneously, the market for single-family homes, which represents the largest share of the housing market, also saw growth. Single-family starts rose a modest 2.8% to 939,000 units. This gradual increase suggests that builders are cautiously moving forward with new projects to meet persistent, albeit constrained, demand for standalone homes.

Building Permits and Builder Sentiment Signal Caution

Despite the positive data on starts, other key indicators point to potential cooling in the coming months. In a contrasting move, building permits, which are a forward-looking gauge of future construction, declined 2.8% in July to 1.354 million units. This is the lowest level for permits in approximately five years. The decline was concentrated in the multi-family sector, signaling that the rapid pace of apartment construction may soon slow. Single-family permits managed a slight 0.5% increase, suggesting a steadier pipeline for houses.

This pullback in permits aligns with a sharp decline in builder confidence. The National Association of Home Builders/Wells Fargo Housing Market Index fell to 32 in August, tying its lowest mark since December 2022. Any reading below 50 indicates that more builders view conditions as poor rather than good. The primary headwind remains high mortgage rates. Although the average rate on a 30-year fixed mortgage eased to around 6.58%, it is still significantly higher than the ultra-low rates of the previous decade, discouraging both buyers and builders.

Builders Rely on Incentives to Attract Buyers

In response to these challenging market conditions, homebuilders are increasingly turning to sales incentives to close deals. The NAHB report noted that over 37% of builders cut home prices in August, a post-pandemic high. Furthermore, 66% of builders offered incentives, which can include everything from subsidized mortgage rates and free upgrades to covering closing costs. These strategies are being deployed to maintain sales momentum and inventory movement in the face of affordability constraints.

The data paints a picture of a housing market at a crossroads. The strong July housing starts figures demonstrate underlying demand and the industry’s ability to deliver new inventory. However, the decline in permits and builder confidence reveals deep-seated concerns about the sustainability of this growth amid economic uncertainty and high interest rates. For potential homebuyers, this means a market where new construction is available, but often only with significant financial incentives to make the purchase feasible. The path of mortgage rates will ultimately determine if this construction momentum can be sustained through the rest of the year.

Must Know

What are housing starts?
Housing starts are a key economic indicator that measures the number of new residential construction projects that have begun during a specific period. Each start is counted when the foundation of a new home or apartment building is poured. This data is a reliable sign of the health of the housing market and broader economic activity.

Why did housing starts increase in July?
The increase in July housing starts was largely driven by a significant jump in the construction of multi-family units like apartment buildings. This surge indicates builders are responding to high demand for rental properties, as many individuals find purchasing a single-family home less affordable due to current mortgage rates.

What is the difference between housing starts and building permits?
Housing starts refer to the actual beginning of construction on a new housing unit. A building permit is official approval granted by a local government agency that allows construction to begin. Permits are a leading indicator, meaning they predict future starts, while starts show current activity.

How do mortgage rates affect home construction?
High mortgage rates make it more expensive for buyers to finance a new home, which can dampen demand. When buyer demand slows, builders become less confident and may pull back on applying for new permits and starting new projects, anticipating slower sales.

What are builders doing to attract buyers?
To attract buyers in a challenging market, a record number of builders are offering sales incentives. These include directly cutting the sale price of homes, buying down mortgage rates to lower monthly payments for the buyer, and offering free upgrades or coverage of closing costs.