So-called housing starts fell to 1.28 million units from 1.45 million in August, the government said Tuesday. That's how many homes could be built in a full year if starts were the same every month as they were in August.

Wall Street economists expected starts to fall to 1.43 million units. All figures are seasonally adjusted.

Housing starts peaked in April 2022 at 1.8 million units.

New housing starts were revised downward in July, to 1.45 million units from an initial increase of 3.9 per cent, or 2 per cent.

New homes have always dominated the housing market, but persistently high prices are starting to scare homebuilders. In anticipation of weakening demand, builders said they have begun to increase price cuts to stimulate home buying in September, according to a survey by the National Association of Home Builders.

As a sign of future construction, building permits rose 6.9% to 1.54 million. This is the highest level since October 2022.

In August, the pace of construction for single-family homes fell 4.3 per cent and for apartment buildings 26.3 per cent.

However, in the South, homebuilders accelerated the pace of construction of single-family homes, with starts rising 8.1 percent in August.

The West saw the largest drop in housing starts at 28.9 percent.

Permits for single-family homes rose 2 percent in August, while building permits for homes with at least five or more units surged 14.8 percent.

About 1.69 million homes were under construction as of August.

Builders are increasingly concerned about the impact that 7% interest rates will have on demand, so they are cutting back on new project starts.

Builder confidence fell to its lowest level in five months in September, according to the NAHB. Homebuilders are increasingly offering incentives, including price reductions, and the percentage of builders cutting prices to boost sales rose to its highest level in nine months, from 25% last month to 32% in September, the NAHB noted.

Nonetheless, given the long-term demand for housing and a decade of underbuilding, builders may not see a sustained drop in demand.

What they're saying. Despite the sharp drop in starts in August, the rise in building permits suggests that housing starts may pick up slightly again, and today's data may reflect some volatility, Canadian Imperial Bank of Commerce Economics (CIBC Economics) said in a report.

Nonetheless, the cooling of construction activity bodes well for the Federal Reserve, which is expected to limit activity in the housing market in an effort to curb inflation.

Capital Economics wrote in a note that interest rates have peaked but "will remain elevated for the rest of the year."

That means, they added, that "as the economy slows, we expect this to result in single-family housing starts levelling off at around 900,000 units by mid-2024, after which the economic recovery will help to stimulate demand from homebuyers and support renewed confidence among homebuilders".