Housing starts drop 8% despite positive housing market indicators.
The Housing Market Faces Challenges as Housing Starts Decline
The number of housing starts declined in June, signaling ongoing challenges in a housing market that has recently shown signs of heating up. This comes after being impacted by the Federal Reserve’s rate hikes.
Housing starts measure the change in the number of new residential buildings that began construction. According to a Wednesday report from the Census Bureau, starts fell 8% from May to this past month, now standing at 1.43 million. Compared to May 2022, they fell 8.1%.
For permits to build, which serve as a proxy for future construction, the seasonally adjusted annual rate of new permits last month was 15.3% lower than the rate in May of the previous year.
This latest report will undoubtedly be closely watched, considering the unique situation that the national housing market finds itself in.
The Complex Dynamics of the Housing Market
The housing market experienced a red-hot period during much of the pandemic, thanks to the Federal Reserve’s near-zero interest rate target. This resulted in ultra-low mortgage rates for homebuyers, driving a surge in demand and causing prices to rise while construction boomed.
However, the equation changed last year when the Fed raised rates and mortgage rates soared above 7%. Demand quickly fell, leading to what many economists referred to as a “housing recession” and a decline in prices.
Now, the situation has become more complex. Mortgage rates remain high, reaching their highest levels since November. However, prices have started to increase. This is primarily due to a lack of supply for existing homes, driving demand for new homes and new construction. Sellers are taking advantage of the scarcity by raising their prices.
Homeowners who locked in sub-3% mortgage rates during the pandemic are holding onto their homes, avoiding putting them on the market because they would have to take out new loans at much higher rates to buy again. As a result, prospective buyers are turning to new homes.
In May, existing home sales were down over 20% compared to the previous year. However, new home sales rose 12.2% to a seasonally adjusted annual rate of 763,000. Sales were 20% higher than in May 2022.
The Fed’s Impact on the Housing Market
The Federal Reserve still has more rate hikes to come. While it paused its tightening cycle at its last meeting, it is highly likely that central bank officials will raise rates at least once more later this month before reassessing in September.
The current interest target set by the central bank is 5% to 5.25%.
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