U.S. Housing Market Cools as Building Permits Fall and Housing Starts Fall

Construction of residential single-family homes by KB Home is under construction in the community of Valley Center, California, U.S. June 3, 2021. REUTERS/Mike Blake

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  • Building permits fell 3.2% in April
  • Single-family permits fell by 4.6%; multi-family fall 1.0%
  • Housing starts slipped 0.2%; single family dives 7.3%

WASHINGTON, May 18 (Reuters) – U.S. housing permits hit a five-month low in April, suggesting the housing market was slowing as rising mortgage rates helped reduce affordability for new buyers and first time buyers.

But Wednesday’s Commerce Department report also showed a record backlog of homes yet to be built, indicating that the moderation in homebuilding would be marginal.

Residential construction was already constrained by soaring prices as well as shortages of materials. The housing market is the most interest rate sensitive sector of the economy, with building permits being a leading indicator of the sector.

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“Housing construction appears to be in transition, with the sector caught between a sharp rise in mortgage rates and declining affordability on the one hand and supply chain constraints on the other which continue to cause an increase in project backlogs,” said Conrad DeQuadros, senior economic adviser at Brean Capital in New York.

Building permits fell 3.2% to a seasonally adjusted annual rate of 1.819 million units in April, the lowest level since last November. They increased by 3.1% over one year. Economists polled by Reuters had forecast building permits would decline at a rate of 1.812 million units.

The decline was centered in the single-family home segment, where permits plunged 4.6% to a pace of 1.110 million units, the lowest level since last October. Permits for buildings with five or more units fell only 0.6% to 656,000 units.

A survey on Tuesday showed the National Association of Home Builders/Wells Fargo housing market index fell to its lowest level in nearly two years in May. Builders blamed the fifth consecutive monthly decline in confidence on soaring prices for building materials as well as rapidly rising mortgage rates.

The 30-year fixed-rate mortgage averaged 5.30% in the week ended May 12, the highest since July 2009, according to data from mortgage finance agency Freddie Mac. It has risen more than 100 basis points since mid-March, when the Federal Reserve began raising interest rates to cool domestic demand and bring down high inflation.

The US central bank has raised its key rate by 75 basis points since March. The Fed is expected to raise that rate by half a percentage point at each of its upcoming policy meetings in June and July.

“Higher mortgage rates would at least create uncertainty in the trajectory of housing demand and discourage builders from taking out speculative housing permits, said Isfar Munir, an economist at Citigroup in New York.

RECORD CONSTRUCTION BACKGROUND

The cooling in housing demand was bolstered by a separate report from the Mortgage Bankers Association on Wednesday showing that applications for loans to buy a home fell 12% last week from the previous week. They are down 15% over one year.

Stocks on Wall Street were trading lower. The dollar appreciated against a basket of currencies. US Treasury yields fell.

Housing starts slipped 0.2% to a rate of 1.724 million units last month. Single-family housing starts, which account for the largest share of housing construction, plunged 7.3% to a pace of 1.100 million units, also the lowest level since last October.

Single-family home construction fell in the densely populated Northeast, Midwest and South, but rose in the West.

Housing starts for housing projects of five or more units jumped 16.8 per cent to 612,000 units, the highest rate since April 1986. Demand for rental apartments is huge.

Although the rental vacancy rate rose in the first quarter, it remains close to the low levels seen in the mid-1980s. There is room for further gains in multi-family housing construction, with permits ahead of construction starts.

Despite the second consecutive monthly decline in overall housing starts, residential construction remains supported by record low housing supply. The number of homes approved for construction that have yet to start rose 0.7% to an all-time high of 288,000 units in April. The backlog of single-family dwellings was the strongest since June 2006.

Home completions fell 5.1% to a rate of 1.295 million units, with single-family dwellings falling 4.9%. Completions of multi-family homes fell 6.6%.

The stock of single-family homes under construction rose 1.0% to a rate of 815,000 units last month, the highest since November 2006. Multi-family homes under construction rose 2.3% to a rate of 811,000 units, the highest since February 1974.

“The housing market remains undersupplied, there is a significant housing supply gap that will not be restored in the near term,” said Abbey Omodunbi, senior economist at PNC Financial in Pittsburgh, Pennsylvania.

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Reporting by Lucia Mutikani Editing by Chizu Nomiyama and Paul Simao

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