Single-family home construction activities in the U.S. fell for the fourth consecutive month in June, primarily due to high interest rates suppressing building activities. According to data released by the U.S. Census Bureau on Wednesday, the seasonally adjusted annual rate of single-family housing starts in June was 980,000 units, down 2.2% from May. Meanwhile, the number of single-family building permits also fell by 2.3% from the previous month, to 934,000 units.
Despite the slowdown in single-family home construction, multi-family housing construction showed significant growth in June, boosting overall housing starts. The monthly growth of multi-family housing reached 19%, increasing the annual rate of multi-family housing starts to 373,000 units, the highest in four months. This surge largely compensated for the decline in single-family home construction.
The high interest rate environment has not only pressured homebuyers but also increased the financing costs for builders. They need to pay higher loan rates to finance their projects, further hindering building activities. According to Freddie Mac, the average mortgage rate in June was 6.92%. With rates nearing 7%, both homebuyers and builders have become more cautious.
Nevertheless, the monthly inventory level of new homes for sale at the current sales pace remains at its highest since the fall of 2022. Census data shows that the inventory of new homes for sale in the U.S. in June was 9.3 months, while the total market inventory was 4.4 months. Real estate experts consider a six-month inventory level as a market equilibrium, indicating that new construction plays a crucial role in the current real estate market.
realtor.com
June typically marks the peak of the homebuying season, but due to high mortgage rates, new home sales in May fell by 11% from the previous month. To address the challenges of high interest rates and affordability, builders are shifting towards constructing smaller, more economical homes. In June, the median price of new homes was lower than that of existing homes, reversing the long-standing trend of new homes being more expensive than existing ones.
Lisa Sturtevant, Chief Economist at Bright MLS, stated, "The demand for single-family homes remains strong. However, higher mortgage rates and record home prices have caused some potential buyers to pause their purchasing plans. Builders continue to attract buyers through price cuts and service upgrades, but as affordability concerns grow and existing home inventory increases, traffic has slowed."
In June, the total number of single-family homes and apartments under construction in the U.S. was 1.56 million units, the lowest since January 2022. A survey by the National Association of Home Builders (NAHB) on Tuesday showed that builder confidence slightly declined in July, reaching its lowest level since December 2023.
NAHB Chairman Carl Harris said, "The decline in single-family housing starts aligns with our latest builder survey results. Despite concerns about the current high-interest rate environment, builders believe that mortgage rates will ease in the coming months, leading to increased building activity in the second half of 2024."
The survey also showed that in July, 31% of builders reduced home prices to boost sales, up from 29% in June. The average price reduction has remained at 6% for the 13th consecutive month. Meanwhile, the proportion of builders using sales incentives stabilized at 61% in July, the same as in June. These data indicate that builders are striving to adapt to the current market environment by attracting buyers through price adjustments and incentives.
Despite the current high rates, with inflation expectations declining, the Federal Reserve is widely expected to start cutting benchmark rates in September. This move could alleviate pressure on homebuyers and stimulate a recovery in the real estate market. NAHB Chief Economist Robert Dietz stated, "An improved interest rate environment will benefit homebuyers, builders, and developers, who are currently facing tight loan conditions and high rates. With relatively low housing inventory, builders are prepared to increase production in the coming months."
