Home Building Fell Sharply; Costs Increased in July

Home construction in the United States continued to slow in July, as higher mortgage rates and high inflation make the building or buying property more costly. According to the Commerce Department, July housing starts fell 9.6% from the month before, a seasonally adjusted annual rate of 1.45 million, down from 1.6 million the previous month. Additionally, building permits declined 1.3% to 1.7 million.

The sharp declines come amid moves by the Federal Reserve to raise interest rates to cool the economy and fight inflation. The permits and housing-construction figures can be unsettled from month to month.

According to the chief economist at PNC Financial Services Group, Gus Faucher, the decline in housing construction makes sense because buying houses and buildings is tied to the economy’s predictions for interest rates. However, consumers are still spending, and the labor market remains strong, which benefits the overall economy.

“When the Fed increases rates, housing activity slows,” said Faucher. The Federal Reserve also said manufacturing output rose in July, mostly in auto production, which is a positive sign for the economy. After falling 0.4% in May and June, manufacturing output rose 0.7% in July. The U.S. built light trucks and cars at an annual rate of 10.7 million in July, marking the highest since July 2020.

While mortgage rates have recently declined, they remain near high levels. The average 30-year fixed-rate mortgage was 5.22% during a recent survey by mortgage lender Freddie Mac. The previous year, the rate was under 3%.

Builder confidence continues decline

Confidence from home builders has also continued to decline. According to the National Association of Home Builders/Wells Fargo housing-market index, home builders’ sentiment fell to the lowest level seen in more than a year.

In August, the monthly confidence index fell to 49, the lowest seen since May 2020, down from 55 in June. The index indicates that builders think the industry may be in a housing recession.

The National Association of Realtors is due to release the most recent sales figures for previously owned homes. Economists queried by The Wall Street Journal expect that sales declined 6.1% in July.

Single-family housing starts, which account for a substantial share of homebuilding, dropped 10.1% to the lowest level since June 2020, a rate of 916,000 units. While single-family homebuilding decreased in the South and Midwest, it rose in the Northwest and West.

The Fed is struggling to bring inflation back to the 2% target of the U.S. central bank. It has hiked its policy rate by 225 basis points since March. Mortgage rates, which work in tandem with the yields of the U.S. Treasury, have soared higher.

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