U.S. Home Building Stalls in an Era of 7.4 Percent Mortgages
U.S. home building is freezing up again. September housing starts, released Oct. 20 by the Commerce Department’s Census Bureau, fell 5.2 percent from August to an annual rate of 1.221 million. That missed the 1.305 million consensus compiled by Reuters and marked the lowest level since May.
Single-family starts, the core of home building, fell 4.6 percent to 859,000, the lowest since September of last year. Building permits, which show how much housing will be built ahead, also trended poorly. Total permits edged down 0.2 percent to 1.40 million, but single-family permits fell 4.0 percent to 845,000, the fewest since March 2023. Apart from a rise in multifamily permits, the volume that will actually lead to starts is itself shrinking.
The cause is the price of money. According to mortgage data firm Freddie Mac, the average 30-year fixed mortgage rate reached 7.40 percent last week, the highest in three years. Mortgage rates do not simply follow the Federal Reserve’s benchmark rate. They track the 10-year Treasury yield traded in markets, and that yield has recently climbed to around 5.1 percent. The war between the United States and Iran pushed up energy prices and inflation concerns, bond yields jumped, and the effect spread to mortgage rates. The Fed raised its benchmark rate last month to a range of 3.75 percent to 4.00 percent, and a hold is widely expected at next week’s meeting. There is, for now, no trigger in sight for rates to come down.
The weight households feel shows in the arithmetic. Borrow $400,000 on a 30-year fixed loan at 7.40 percent and principal and interest alone come to about $2,770 a month. At 6 percent, the payment would be about $2,400, or $370 lighter each month. With home prices not falling much either, that gap is why households are putting off buying a home.
Buyers and Builders Alike Have Stopped
Builders are in a similar position. The National Association of Home Builders said on Oct. 19 that its October builder sentiment reading was the lowest since June 2012. The association cited rising materials and diesel costs and mortgage rates, along with a labor situation worsened by stepped-up immigration enforcement. In the association’s survey, traffic from prospective buyers fell to its lowest since April 2012. The National Association of Realtors’ September pending home sales also fell to a record low.
Contradictory scenes overlap in the market. Sales are sluggish and unsold new-home inventory is piling up, yet the United States as a whole is structurally short of housing, keeping prices of existing homes high. Builders, burdened by inventory, are cutting back new starts, while buyers are pressed by the double burden of prices and rates.
Christopher Rupkey, chief economist at FWDBONDS, told Reuters the weak starts were no surprise, asking who could afford to live in the homes builders put up. He said the housing market would fall into a deep sleep unless Washington changes policy. Stephen Stanley of Santander US Capital Markets, by contrast, said a slowdown in starts is actually needed with inventory piling up, and that slowing the pace of supply is the way to keep the market in balance.
The housing cost burden has become the biggest issue in politics ahead of the Nov. 3 midterm elections. Morgan Stanley estimates residential investment contracted again in the third quarter. The Census Bureau notes that the starts data are volatile and take time to reveal a trend, but the direction this reading points to is clear. Unless rates move first, neither home building nor household arithmetic is likely to move from where it stands.
