Construction of U.S. homes fell more than expected in July as the housing market continued to struggle with high supply costs and home prices.

The Commerce Department reported Wednesday that housing starts dropped 7% to a seasonally adjusted annual rate of 1.534 million units last month. Economists polled by Reuters had forecast starts would decline to a rate of 1.600 million units.

The rise in housing prices is being driven by an acute shortage in inventory while production bottlenecks have resulted in high supply costs.

“As demand continues to overpower builders’ ability to keep up with new inventory, we will keep seeing a stressed housing market and interested buyers sitting on the sidelines until construction returns to historical levels,” said Bill Banfield, executive vice president of capital markets at Rocket Mortgage.

The July housing report also showed permits for future home building rose 2.6% to a rate of 1.635 million units, a sign that builders intend to construct more housing. However, the gain, which followed three straight monthly declines, was in the volatile multi-family home segment, while single-family permits fell 1.7% month over month to the lowest level since July 2020.

“The decline in single-family permits indicates that builders are slowing construction activity as costs rise,” said Danushka Nanayakkara-Skillington, assistant vice president of forecasting & analysis at the National Association of Home Builders (NAMH).

A survey from the NAMH earlier this week showed confidence among single-family homebuilders dropped to a 13-month low in August because of higher material costs and home prices.

As Reuters reports, “Homebuilding has struggled to gain traction since racing to a rate of 1.725 million units in March, which was the highest level since June 2006.” Housing demand boomed during the COVID-19 pandemic, reflecting record-low mortgage rates, but has far outpaced supply.

“Solid housing demand and low inventory will incentivize homebuilders and support housing starts, but higher input and labor costs will temper activity,” said Oren Klachkin, lead U.S. economist at Oxford Economics in New York. “We expect a modest pickup in housing starts in the third quarter in the wake of last quarter’s 2% decline.”

Image by Paul Brennan from Pixabay

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