New U.S. home construction dropped in August to the lowest level since 2020, underscoring the ongoing challenges facing the housing market.
Housing starts tumbled 11.3% last month to an annual rate of 1.28 million units, according to new Commerce Department data released Tuesday. That is well below Refinitiv economists’ forecast for a pace of 1.44 million units.
Applications to build – which measures future construction – saw an uptick in August, climbing 6.9% over the course of the month to an annualized rate of 1.54 million units. Compared with the same time last year, building permits are down about 2.7%.
“August’s home construction data appear to be showing some cracks in the armor of what has been one of the few strong indicators in the housing market recently,” said Daniel Vielhaber, an economist at Nationwide. “Still, it’s important to note that there could be a noise component here as much of the sharp decline in starts came from the multifamily sector, which is notoriously volatile.”
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 five points to 45, the lowest reading since April 2023. The decline followed a six-point drop in August.
Any reading below 50 is considered negative.
Sentiment among builders had been steadily rising earlier this year as limited resale inventory pushed would-be buyers to seek out new construction instead. But when mortgage rates shot above 7% in September, it throttled demand among would-be homebuyers.
“High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower,” said Robert Dietz, chief economist at NAHB.
Rates are expected to remain elevated, as the Federal Reserve has hinted that it may hold interest rates at peak levels for longer than previously anticipated.
Rates on the popular 30-year fixed mortgage are currently hovering around 7.18%, according to Freddie Mac, well above the 6.02% rate recorded one year ago and the pre-pandemic average of 3.9%. It is near the highest level in two decades.