Thank lower rates? Maybe. Probably. Sure.
New construction data released ahead of the Fed on Wednesday showed US housing starts rebounded sharply last month to post the largest gain since February.
The 9.6% MoM advance blew past consensus, which expected a more pedestrian 6% increase.
As the figure shows, the series is trying to stage a sustainable recovery after trundling to the worst levels since the plunge that accompanied the onset of the pandemic in 2020. Lower rates might help.
An escalatory bond rally that’s now in its fifth month pushed financing costs to a two-year low over the last week, according to the MBA’s Wednesday update.
In one (very) important respect, persistently elevated rates actually bolstered homebuilders: By shackling existing homeowners in “golden handcuffs,” six- and seven-handle mortgage rates facilitated an acute dearth of resale inventory, leaving new construction as the only game in town.
But builders grew weary of the squeeze on margins late last summer, when a steep selloff at the long-end of the Treasury curve pushed rates so high that would-be buyers needed incentives even to entertain the increasingly far-fetched fantasy of owning a home. The NAHB’s sentiment gauge fell four straight months this time last year, before rebounding, only to slide again as the onerous affordability calculus continued to bedevil buyers in 2024.
Builder moods inflected in September, but the upturn was unimpressive. At 41, the NAHB gauge remains well below the threshold separating net optimism from pessimism. That series tracks single-family starts pretty well for obvious reasons.
As the figure shows, single-family construction picked up in August, rising 16% from July. That was the first gain since February and the most pronounced since May of 2020.
Permits rose nearly 5% in the government’s release, quintuple the collective wisdom of economists who get paid handsomely to be wrong with no accountability (it’s great work if you can get it). Single-family permits rose 3%.
As a reminder, there’s no inventory shortage on the new construction side of the supply-demand equation. Builders are sitting atop the most unsold homes since 2008. They (builders) are hoping lower rates will help them work through that. But other than death, there are no guarantees in life, and besides, it’s not just an inventory overhang that keeps builders up at night.
“Thanks to lower interest rates, builders now have a positive view for future new home sales for the first time since May 2024 [but] the cost of construction remains elevated relative to household budgets, holding back some enthusiasm for current housing market conditions,” NAHB Chairman Carl Harris, who builds custom homes in Wichita, said.
At the same time, lower rates mean the resale market’s likely to mount a comeback. “Builders will face competition from rising existing home inventory in many markets as the mortgage rate lock-in effect softens with lower mortgage rates,” Harris went on.
On Wednesday, the MBA’s Joel Kan thanked “market expectations of a rate cut from the Fed” for the ongoing decline in rates, illustrated below.
Purchase activity rose 5% from the prior week, and the index is now at its best levels since June.
Kan called it “notable” that conventional purchase apps ran at a faster pace versus last year. That “drove overall purchase applications very close to year-ago levels,” he added. “Homebuyers are seeing improving affordability conditions, sparked by lower rates and slower home-price growth.”
That’s all good news. Really it is. But if we’re honest, “affordable” is by now a tragic misnomer as it relates to US housing. And as it relates to pretty much everything else for that matter.
