JOn Tuesday, indicators of the health of the housing market were mixed, with building permits down but housing starts up unexpectedly.
Future home building permits plunged at a seasonally-adjusted annual rate of 1.517 million, more than most economists had expected and the lowest level since just after the coronavirus pandemic took hold over two years ago. The total number of building permits, an indicator of future construction, fell 10% in August.
On the other hand, and in unexpected good news for the housing market, the total number of housing starts exceeded forecasts and increased by 12.2% to reach a seasonally adjusted annual rate of 1.575 million. units in August. Housing starts measure the annualized change in the number of new residential buildings on which construction has begun. In July, housing starts were underwater, down 9.6%.
“The jump in residential housing construction in August will clearly not be music to the ears of Fed officials as they sit down to dinner today,” said Chris Rupkey, chief economist at FWDBONDS.
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“Housing is the most interest rate sensitive sector of the economy, and if housing construction ignores the Fed’s anticipated rate hikes, that means Fed officials will have to try even harder. to slow demand in the economy,” he added. .
The Fed raised interest rates to contain the nation’s runaway inflation and had to do so with more force than most economists had expected. The result is that mortgage rates have risen and made homes more unaffordable, hurting the construction and housing sectors.
Mortgage rates climbed more than 6% for the first time since the Great Recession last week. The average 30-year fixed-rate mortgage is now 6.02%, up more than 3.1 percentage points from a year earlier, according to Freddie Mac, and a jump of 0.13 on the week. last.
The Fed has raised rates twice by 75 basis points so far this year. The first hike marked the most aggressive increase since 1994, and there is expected to be another giant rate hike after the Federal Open Market Committee meeting on Wednesday, with some investors even betting that the central bank will go one step further and raise rates up by 100 basis points.
Another major factor hurting the housing market, which perhaps isn’t talked about as much, is homebuilder confidence, which measures market conditions in the single-family building space.
The National Association of Home Builders reported last month that homebuilder confidence has fallen for eight straight months. The NAHB/Wells Fargo Housing Market Index found that builder confidence in the market for newly built single-family homes plunged 6 percentage points this month to fall into negative territory for the first time in a brief period. at the start of the pandemic.
About 1 in 5 homebuilders surveyed said they had cut prices in the past month to limit cancellations or boost sales, while nearly 70% blamed rising interest rates on lower demand for accommodations.
“The Federal Reserve’s monetary policy tightening and persistently high construction costs have caused a housing slump,” said NAHB chief economist Robert Dietz. “The total volume of single-family housing starts will show a decline in 2022, the first such decline since 2011.”
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Those in the housing sector will also be keeping a close eye on Wednesday’s latest report on existing home sales, which are expected to post another month of declines as higher rates hammer the economy.
For July, sales of existing homes fell 5.9% – the sixth straight month of decline, according to the National Association of Realtors. Sales are down 20.2% from a year ago and have accelerated as the year progressed.