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New U.S. home construction slumped again in November as high mortgage rates combined with pervasive inflation continued to cool demand and the once red-hot housing market.
Housing starts slid 0.5% last month to an annual rate of 1.427 million units, according to new Commerce Department data released on Tuesday. That is above Refinitiv economists' forecast for a pace of 1.40 million units.
Applications to build – which measures future construction – fell to an annual rate of 1.34 million units, a decrease of 11.2% from October. Permits for construction of single-family homes, which account for the biggest share of homebuilding, also dropped 7.1% to the lowest level since May 2020.
"The housing market is coming off from a euphoric run during the post-pandemic period of historically low interest rates," said Jeffrey Roach, chief economist at LPL Financial. "Rising borrowing costs and hesitant home builders could make the nationwide housing shortage worsen in the near term if activity cools below 2019 levels."
INFLATION EASES MORE THAN EXPECTED IN NOVEMBER TO 7.1%, BUT CONSUMER PRICES REMAIN ELEVATED
Houses under construction at the Norton Commons subdivision in Louisville, Kentucky, US, on Friday, July 1, 2022. (Photographer: Luke Sharrett/Bloomberg via Getty Images / Getty Images)
The data comes one day after the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, fell for the 12th consecutive month to 31, marking the worst stretch for the housing market since the survey launched in 1985.
Any reading above 50 is considered positive; prior to this year, the gauge has not entered negative territory since 2012, excluding a brief – but steep – drop in May 2020.
The index has fallen to half of what it was just six months ago, when it stood at 76. It peaked at a 35-year high of 90 in November 2020, buoyed by record-low interest rates at the same time that American homebuyers – flush with cash and eager for more space during the pandemic – started flocking to the suburbs.
December's reading was below the median expectations among economists for an increase to 34 from last month's recording of 33.
A "For Sale" outside a house in Hercules, California, US, on Tuesday, May 31, 2022. (Photographer: David Paul Morris/Bloomberg via Getty Images / Getty Images)
"In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers," said NAHB Chairman Jerry Konter, a homebuilder and developer from Savannah, Georgia. "Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions."
The interest rate-sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades. Policymakers already approved six straight interest rate hikes, including four 75-basis-point increases in June, July, September and November, and have shown no sign of pausing as they try to crush stubbornly high inflation.
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The average rate for a 30-year fixed mortgage fell to 6.31% last week, according to recent data from mortgage lender Freddie Mac. While that is significantly higher than just one year ago when rates stood at 3.12%, it's down from a peak of 7.08% notched in November.