Housing starts unexpectedly jump 12.2% in August but building permits drop

New home construction rises to highest level since June

New U.S. home construction unexpectedly surged in August, but a decline in building permits underscores how rising interest rates are continuing to cool overall demand for housing.

Housing starts climbed 12.2% last month to an annual rate of 1.575 million units, according to new Commerce Department data released on Tuesday. That is above Refinitiv economists' forecast for a pace of 1.445 million units.

The increase stemmed from a jump in multifamily housing construction, evidence that rising borrowing costs combined with steep home prices are pushing potential homebuyers out of the market. 

Applications to build – which measures future construction – slowed to an annual rate of 1.52 million units, which is the lowest since June 2020. 

INFLATION ROSE FASTER THAN EXPECTED IN AUGUST, KEEPING PRICES PAINFULLY HIGH

The total labor force is now about 600,000 smaller than it was in early 2020, right before widespread COVID-19 restrictions plunged the economy into a recession.

Houses under construction at the Norton Commons subdivision in Louisville, Kentucky on Friday, July 1, 2022. (Photographer: Luke Sharrett/Bloomberg via Getty Images / Getty Images)

The data comes one day after the release of the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market. The gauge fell for the ninth consecutive month to 46, marking the worst stretch for the housing market since the 2008 financial crisis.

Any reading above 50 is considered positive; prior to this year, the gauge has not entered negative territory since a brief – but steep – drop in May 2020. 

The index has fallen considerably from just one year 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.

"Builder sentiment has declined every month in 2022," NAHB chief economist Robert Dietz said. "And the housing recession shows no signs of abating as builders continue to grapple with elevated construction costs and an aggressive monetary policy from the Federal Reserve."

US housing market

A view of houses in a neighborhood in Los Angeles on July 5, 2022. - While two years of a booming U.S. housing market brought wealth to many, a shortage of housing is making homeownership unaffordable for millions of Americans with prices up more tha (Photo by FREDERIC J. BROWN/AFP via Getty Images / Getty Images)

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 a 75-basis-point rate increase in both June and July and are expected to approve another at the conclusion of their two-day meeting this week.

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The average rate for a 30-year fixed mortgage climbed to 6.02% for the week ending Sept. 15, according to recent data from mortgage lender Freddie Mac. That is significantly higher than just one year ago when rates stood at 2.86%.