Housing starts rise amidst conflicting housing market signals.
The Housing Market: Mixed Signals and Rising Rates
The number of housing starts in July showed a slight increase, despite the impact of rising mortgage rates. This adds to the mixed signals regarding the health of the market, leaving experts uncertain about its future.
Housing starts are a crucial measure of the change in the number of new residential buildings that began construction. According to a report from the Census Bureau, starts rose by 3.9% from June to this past month. Currently, they are at a seasonally adjusted annual rate of 1.452 million, marking a 5.9% increase from July 2022.
On the other hand, permits to build, which serve as a proxy for future construction, experienced a decline. The seasonally adjusted annual rate of new permits last month was 13% below the rate in July of last year.
Mortgage rates have been steadily climbing, reaching multi-month highs after the Federal Reserve’s decision to hike interest rates in July. According to Mortgage News Daily, the average rate on a 30-year fixed-rate mortgage is now above 7.25%, the highest it has been since November.
The Impact of Low Mortgage Rates and Changing Demand
The housing market experienced a surge during the pandemic due to the Federal Reserve’s near-zero interest rates, resulting in historically low mortgage rates. This led to a significant increase in demand, driving up prices and sparking a construction boom.
However, the situation changed last year when the Fed raised rates, causing mortgage rates to soar above 7%. This sudden increase in rates, compared to the sub-3% levels during the pandemic, led to a decline in demand and falling prices.
Despite the high mortgage rates, there are recent indications that the housing market is showing resilience. One key factor is the scarcity of existing homes for sale, as buyers who secured the low mortgage rates are holding onto their properties. This scarcity has pushed prospective buyers towards new homes.
In June, sales of existing homes declined by 18.9% compared to the previous year, while sales fell by 3.3% to a seasonally adjusted annual rate of 4.16 million, according to the National Association of Realtors. Total housing inventory is down 13.6% from a year ago.
Although new home sales data have been inconsistent, with some reports showing declines and others showing increases, the demand for more inventory has prompted builders to continue constructing. This is not only beneficial for the housing market but also for the broader economy, as it leads to job creation and increased spending.
The Outlook for the Construction Industry
Despite the positive aspects, the higher mortgage rates, particularly in recent months, have dampened the outlook for the construction industry. Builder confidence, which had been steadily rising for seven consecutive months, fell in August, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
However, Alicia Huey, the Chairman of the NAHB, remains optimistic about the demand for new construction. She highlights that while housing affordability remains a challenge, the lack of resale inventory has led many homeowners to stay put due to their low mortgage rates. This ongoing demand for new construction helps support the industry.
Overall, the housing market continues to face mixed signals and challenges, with rising mortgage rates impacting buyer demand and builder confidence. However, the scarcity of existing homes and the need for more inventory provide some hope for the market’s future.
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