Homebuilders are pulling back, but permit activity suggests things will turn around soon

Housing starts fell to a seasonally adjusted annual rate of 1,283,000 in August, according to the U.S. Census Bureau. It’s a 11.3% drop from the revised July estimate of 1,447,000 and 14.8% below the August 2022 rate of 1,505,000.

On the bright side, permits for future construction recorded a 6.9% gain from July, indicating some builders might be more hopeful that things will turn around soon. (Permits were 2.7% lower on an annual basis.)

The sharp decrease in housing starts came after a significant uptick in July.

Single-family starts were modestly lower from July, but starts on buildings with five or more units plunged roughly 26% month over month, Kate Wood, home expert at NerdWallet, said.

Overall, single‐family housing starts in August came in at a rate of 941,000, which is 4.3% below the revised July figure of 983,000. However, it was 2% higher than a year ago, Bright MLS Chief Economist Lisa Sturtevant noted. This annual increase in new starts was driven entirely by new construction activity in the South region, she noted.

“In the high-cost Northeast and West regions, new single-family starts fell from a year ago and have generally been down year-over-year for the past 12 months. Single-family construction also slowed in the Midwest region in August, down 15.1% year-over-year,” she said.

Meanwhile, the housing starts rate for units in buildings with five units or more was 334,000, declining dramatically in August, down 41.0% compared to a year ago.

“The slowdown in new multifamily starts is a reaction to the perceived oversupply of apartments in some markets,” Sturtevant observed.

Single-family permits increased (+2%) to 949,000 in August while multifamily permits came in at 535,000. Completed homes picked up 5.3% from the prior month and were 3.8% above the August 2022 level. However, the pace of single-family home completions fell from the prior month.

Meanwhile, builder sentiment dipped in September for the second month in a row, falling below the break-even point of 50. 

“Declining affordability is holding back potential buyers as mortgage rates remain 7% for the fifth week in a row,”  First American Economist Ksenia Potapov said.

However, demand in the housing market remained buoyed by the lack of resale inventory. As a result, a number of potential buyers turned to the new-home market. To make their product more attractive, a record share of homebuilders offered sales incentives in September, the National Association of Homebuilders reported.

Overall, there is still an elevated number of single-family and multi-family homes under construction.

“When these units are completed, it should put downward pressure on prices and provide some affordability relief,” Potapov said.