Housing starts fall to three-year low amid 7% mortgage rate

REAL ECONOMY BLOG | September 19, 2023

Authored by RSM US LLP

Housing starts in the United States fell by a sharp 11.3% in August, the second double-digit drop in three months, signaling more strain on the housing market because of elevated mortgage rates that exceed 7%.

August’s number was the lowest since June 2020 as the pandemic set in, according to Commerce Department data released Tuesday. That should add some downside risk to gross domestic product growth this quarter, which we forecast at 2.7%.

In contrast to starts, building permits, which are a proxy for future starts, rose by 6.9% in August to the highest level since October. The gain was mostly driven by a 15.8% surge in permits for multifamily units as developers looked to offer more affordable options to buyers.

The mixed signals from Wednesday’s housing report did not provide any relief for a stressed market. That was aligned with the recent drop in builder sentiment, which fell to the lowest point since April.

On a more positive note, housing completions rose by 5.3% in August after dropping for two months in a row, adding to the supply of new homes. That should help ease some of the pricing pressure going into the last quarter of the year.

In terms of regional markets, housing starts dropped in all but the Northeast with the West leading the decline, likely because of Hurricane Hilary, which hit California in August.