Why June’s Rise in Housing Construction May Not Indicate a Home Building Surge

Housing construction increased in June, but it wasn’t the type of homebuilding surge economists had hoped for

Housing starts came in at an annual rate of 1.35 million in June, an increase of 3% from the prior month , while building permits made a similar jump to hit an annual rate of 1.45 million, Census Bureau data showed. Both hovered near economists’ forecasts.

While housing construction was higher, Wells Fargo economists Charlie Dougherty and Jackie Benson said the headline numbers belie subdued homebuilder activity.

If New Homes Weren’t Constructed, What Was?

Multifamily housing, such as apartments and condos, drove most of the gains in June. Permits and housing starts for single-family homes were lower in June, as builders contend with slower new home sales amid high interest rates.

“All told, the headwinds created by restrictive monetary policy appear to be intensifying for home builders,” the Wells Fargo economist wrote. “Financing their operations has become more expensive and demand appears to be waning as a result of elevated mortgage rates, increased supply in the resale market and cooling labor market conditions.”

The housing market has been weighed down by affordability issues caused by high mortgage rates and limited existing home inventory . That gridlock could be loosened by building more new homes, economists have said.

Interest Rates Hamstring Builders

Paradoxically homebuilders are feeling down about the market: High interest rates make financing projects more expensive and keep potential buyers away. However, builders have expressed more optimism about the future, likely because of prospective Federal Reserve interest rate cuts that would relieve some of the pressure.

However, that may not fully alleviate builders’ anxiety, one economist said.

“Even with the prospect of lower mortgage rates this year if the Fed cuts rates as expected, builders already have a backup of houses in inventory and recognize it will take more than one or two cuts to motivate buyers off the sidelines,” wrote Robert Frick, corporate economist at Navy Federal Credit Union.