In July, the US experienced a significant surge in single-family homebuilding, accompanied by an increase in permits for future constructions, providing a much-needed boost to the economy. However, with mortgage rates nearing two-decade highs, there is a looming question on the continuity of this upward trajectory in the housing market.
A Resilient Market Amid Economic Shifts
The Commerce Department reported a notable rebound in the groundbreaking of single-family housing units, indicative of the economy’s resistance to recessive trends. This uplift follows the robust retail sales in July, prompting economists to raise their third-quarter growth estimates.
- Single-family housing starts increased by 6.7% to a rate of 983,000 units in July and marked a 9.5% YoY rise.
- Regional data showed a 28.5% soar in the West and a 12.5% increase in the Midwest, with slight declines in the Northeast and South.
Christopher Rupkey, chief economist at FWDBONDS in New York, opined:
“Housing generally has shown resilience, but Fed officials may overlook this latest news of strengthening demand in the economy when it comes to judging whether to hike rates again this year because of the progress made on the inflation front.”
Mortgage Rates and Homebuilders’ Confidence
A potential hurdle to continuous improvement is the upswing in mortgage rates. Freddie Mac’s recent data highlighted that the average rate on the 30-year fixed mortgage escalated to 6.96%, approaching the highs last seen in April 2002. This rise in rates correlates with the dip in homebuilders’ confidence in August, as noted by the National Association of Home Builders.
Permit Trends and Construction Outlook
Permits, indicative of future construction activities, experienced a 0.6% rise in July to a rate of 930,000 units, marking the sixth consecutive monthly increase.
- Midwest and South witnessed a rise in permits.
- The Northeast saw a significant decline, while the West remained stable.
- Overall building permits slightly rose to a rate of 1.442 million units in July.
Nancy Vanden Houten, U.S. lead economist at Oxford Economics in New York, expressed optimism, stating:
“The need for new single-family homes, which is driven by scarce existing home inventory, should keep a floor under single-family construction.”
Addressing the Housing Supply Crunch
Despite the positive starts, the housing supply continues to grapple with constraints. There was a 0.4% drop in houses approved for construction yet to be started, and the single-family homebuilding backlog decreased by 0.7%. The inventory of housing under construction also portrayed mixed trends.
- Single-family housing under construction: Dropped by 0.7% to a rate of 678,000 units.
- Multi-family housing under construction: Increased by 1.1% to 986,000 units, hitting the highest level since 1970.
Industrial Rebound and Economic Implications
The industrial sector, though previously affected by the central bank’s rate hikes, experienced a rebound with a 0.5% rise in factory output in July. This resurgence, driven by a 5.2% surge in motor vehicle and parts production, echoes the uplift in the broader economy. Goldman Sachs’ economists adjusted their third-quarter GDP tracking estimate upward, citing increases in motor vehicles and utilities production.
Daniel Silver, an economist at JPMorgan, however, expressed caution.
“We don’t think these strong July increases are fully representative of the underlying trends, because it looks like temporary factors helped boost the July readings,” he remarked.