- Housing Starts Down 9.6%; Building permits decreased 1.3%
- Single household begins to decline by 10.1%; Permits drop 4.3%
- Home construction backlog up 5.0%
- Industrial production rebounded 0.7%
WASHINGTON (Reuters) – U.S. home construction fell to its lowest level in nearly a year and a half in July, dragged down by higher mortgage rates and building materials prices, suggesting that the housing market may contract further in the third quarter.
Declining housing market fortunes refocused fears of a broader economic recession. But with other data on Tuesday showing industrial production rising to an all-time high last month despite the higher interest rate environment, the Federal Reserve is expected to remain on the path of tightening monetary policy.
“Reading tea leaves about economics hasn’t been this difficult in years,” said Christopher Robke, chief economist at FWDBONDS in New York. “Industrial production has fallen in every recession in history, so the record high this month does not match a contraction.”
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Housing starts fell 9.6% to a seasonally adjusted annual rate of 1.446 million units last month, the lowest level since February 2021. The June data was revised slightly higher to a rate of 1.599 million units from the previously reported 1.559 million units. Economists polled by Reuters had expected start-ups to decline to an average of 1.540 million units.
Single-family housing starts, which account for the largest share of home construction, fell 10.1% to an average of 916,000 units, the lowest level since June 2020. Building single-family homes declined in the densely populated Midwest and South, but rose in the United States. West and Northeast.
The percentage of starting residential projects with five units or more decreased by 10.0% to 514 thousand units. Multifamily housing construction continues to be fueled by strong demand for rental apartments, with rising borrowing costs pushing home ownership out of the reach of many Americans.
Future home building permits fell 1.3% to an average of 1.674 million units. Single-family building permits decreased by 4.3% to 928,000 units. Permits for multi-family housing projects increased by 2.5% to 693,000 units.
The Federal Reserve, which is struggling to bring inflation back to the US central bank’s 2% target, has raised its interest rate by 225 basis points since March. Mortgage rates, which move in tandem with US Treasury yields, soared even higher.
The 30-year fixed-rate mortgage is hovering around an average of 5.22%, up from 3.22% at the start of the year, according to data from mortgage finance agency Freddie Mac.
Fixed residential investment declined at its most rapid pace in two years in the second quarter, contributing to the second consecutive quarterly decline in GDP during that period. More pain will likely come to the housing market.
Monday’s survey showed that the Wells Fargo/National Home Builders Market Confidence Index fell for the eighth consecutive month in August, falling below the break-even level at 50 for the first time since May 2020. Rising construction costs and mortgage rates were largely blamed for the decline.
Stocks on Wall Street traded unevenly. The dollar settled against a basket of currencies. US Treasury bond prices fell.
Extensive Manufacturing Gains
While housing struggles, another interest rate-sensitive sector is moving forward at the moment.
In a separate report on Tuesday, the Federal Reserve said industrial production rebounded 0.7% in July after declining 0.4% in June.
Economists had expected factory output to rise 0.2%. Output increased 3.2% compared to July 2021. Manufacturing, which accounts for 11.9% of the US economy, continues to be supported by strong demand for goods even as spending gradually shifts to services.
But the risks are rising, with retailers sitting on excess inventory, especially clothing. A stronger dollar as a result of tighter monetary policy could increase the cost of US exports.
Production at auto plants rose 6.6% last month. Excluding autos, manufacturing rose 0.3%. Output of manufactured long-lasting consumer goods increased by 3.5%, while production of non-durable consumer goods decreased by 0.3%.
Mining production rose 0.7%, with oil and gas extraction continuing to support it. Production at the facilities fell 0.8%. The rise in manufacturing and mining production helped lift the overall industrial production index by 0.6% to a record high of 104.8. Industrial production was unchanged in June.
Strong industrial production contrasts starkly with regional factory surveys that showed a sharp deterioration in business sentiment.
“Recessions are usually a loss of confidence, and sentiment for manufacturers appears to have eroded,” said Ryan Sweet, chief economist at Moody’s Analytics in West Chester, Pennsylvania. “However, it is important to watch what manufacturers are doing rather than saying it. Right now, manufacturers are not behaving as if the economy is in or heading toward a recession.”
Although high borrowing costs are chilling in the housing market, a complete meltdown is unlikely due to a severe shortage of single-family homes for sale, driving up prices. Fewer homes being built due to fiscal constraints could pose a dilemma for the Federal Reserve, which is seeking to lower home prices by slowing home demand.
“Low construction will limit housing supply and potentially mitigate the impact of higher rates on home prices,” said Isfar Munir, an economist at Citigroup in New York.
The number of homes approved for construction yet to start rose 5.0% to 296,000 units. The backlog of single-family homes increased 2.1% to 146,000 units, with the completion rate for this segment declining by 0.8%.
The stock of single-family homes under construction fell 1.2% to 816,000 units.
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(Covering) Lucia Mutikani Editing by Mark Porter, Mark Potter and Paul Simao
Our criteria: Thomson Reuters Trust Principles.
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