Housing starts tumble as rising mortgages cool demand

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Payne Capital Management President Ryan Payne discusses the state of the volatile U.S. housing market as fears for a recession grow on Mornings with Maria.

New U.S. home construction slumped in September, adding to evidence that rapidly rising mortgage rates are continuing to cool demand and the once red-hot housing market.

Housing starts slid 8.1% last month to an annual rate of 1.439 million units, according to new Commerce Department data released on Wednesday. That is below Refinitiv economists' forecast for a pace of 1.475 million units.

Applications to build – which measures future construction – rose to an annual rate of 1.56 million units, led by multifamily properties. 

Permits for construction of single-family housing starts, which account for the biggest share of homebuilding, tumbled 3.1% in September to a rate of 872,000 units, the lowest since June 2020. 

"Housing is still slowing and has more downside to go," said Jeffrey Roach, chief economist at LPL Financial. "Home builders are feeling the impact of slowing demand, as higher borrowing costs weigh on prospective home buyers. Declining residential investment will place a drag on growth, raising recession risks in the coming quarters."

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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 tenth consecutive month to 38, 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 had 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.

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WASHINGTON, DC – SEPTEMBER 19: The Marriner S. Eccles Federal Reserve Board Building is seen on September 19, 2022 in Washington, DC. ((Photo by Kevin Dietsch/Getty Images) / Getty Images)

"High mortgage rates… have significantly weakened demand, particularly for first-time and first-generation prospective home buyers," said NAHB Chairman Jerry Konter, a home builder and developer from Georgia. "This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis."

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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 five straight interest rate hikes, including three 75-basis-point increases in June, July and September, and have shown no sign of slowing down as they try to crush stubbornly high inflation.

The average rate for a 30-year fixed mortgage climbed to 6.92% for the week ending Oct. 15, according to recent data from mortgage lender Freddie Mac. That is significantly higher than just one year ago when rates stood at 3.05%.