The gap between policymakers’ housing ambitions and market reality is widening, with housing starts and permits falling to recession levels in October despite widespread calls for more construction.
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Recent data from the Census Bureau shows that housing starts are 3.1% lower than the revised September estimate, reaching a seasonally adjusted annual rate of 1,311,000 units. Building permits fell by 0.6% compared to September, which represents a decrease of 7.7% compared to October 2023.
The numbers add friction to recent comments from Federal Reserve officials, including Minneapolis Fed President Neel Kashkari, who suggested housing demand remains robust enough to warrant higher mortgage rates, according to HousingWire.
The data tells a different story: Sales of existing homes are at a record low for the third consecutive year, adjusted for workforce size.
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Builder behavior offers telling insights into market conditions. HousingWire said construction companies have shown more optimism when mortgage rates approach 6%, but consistently pull back when rates rise between 6.75% and 7.5%. The pattern extends beyond single-family homes, with multi-unit permits already at recession levels.
The market’s sensitivity to interest rates became apparent during a brief period of improved confidence among builders, when mortgage rates temporarily fell from 7.5% to 6%. While builders are still able to boost sales through interest rate buydowns, maintaining interest rates in the low 6% range has proven to be a challenge.
Looking ahead, the path to more housing construction faces hurdles. Lower Fed rates could theoretically support land purchases and apartment construction, but these developments require a long lead time. The current slowdown in the construction sector threatens to worsen rental inflation as supply constraints persist.
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Sales of new homes are lagging behind the levels of the 2001 technical recession, underscoring the severity of current market conditions. The reality sharply contradicts 2021 predictions that predicted a decade-long construction boom.
Instead, rising interest rates have dramatically cooled construction activity.
