Economist: 'Downturn in housing starts has much further to run'

An unexpected rise in building permits last month doesn't necessarily mean housing is turning around, experts say, especially as high mortgage rates continue to sap buyer demand.

“Ignore the uptick in permits,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote. “The downturn in housing starts has much further to run.”

Residential starts – including both single and multi-family units – decreased 8.1% last month to a 1.44 million annualized rate, according to government data released Wednesday. That was slightly lower than the 1.461 million units economists surveyed by Bloomberg had forecast.

Applications to build rose 1.4% to an annualized rate of 1.564 million units in September from 1.542 million the prior month and up from the Bloomberg consensus expectation of 1.530 million.

“Housing starts lag permits, which ultimately are driven by mortgage demand, and the purchase applications index is now dropping to new cycle lows in the wake of the near 150bp increase in mortgage rates since mid-August,” Shepherdson wrote.

The Federal Reserve has been aggressively hiking interest rates since March to tame rising prices. That has helped to send the 10-year Treasury yield higher, which fixed mortgage rates track. Last week, the 30-year fixed mortgage rate nearly reached 7% – the highest since 2002, according to Freddie Mac.

“Net, net, the housing crisis in construction is very real as builders assess the negative effect of 7% mortgage rates, but residential building construction is actually two different markets,” Christopher Rupkey, chief economist at FWDBONDS, wrote in a note.

The construction for multi-family units fell to a 530,000-unit pace in September, down from 621,000 in August. That’s a 13.2% drop.

The decline in construction of multifamily dwellings was due to homebuilders pulling back as home sales weakened and other private rental data show a softening of lease signings for new apartments, according to NAR Chief Economist Lawrence Yun.

Still, permits for multi-family came in at an annualized rate of 644,000 in September, up from the 571,000 pace in August.

“Affordability is driving the construction of more multi-family units, while single-family home building is slowing as you would expect in the rising interest rate environment and this is leading to the dramatic drop in builder confidence seen in surveys,” Rupkey said.

In a separate report, a measure of U.S. homebuilder sentiment dropped for the 10th consecutive month in October. The index from the National Association of Home Builders (NAHB)/ Wells Fargo decreased 8 points to a reading of 38 from the previous month, the weakest level since the pandemic.

“The ongoing decline for single-family construction mirrors weakness for single-family builder sentiment, which has now declined for 10 straight months and stands at half the level of a year ago,” NAHB Chief Economist Robert Dietz wrote in a statement. “The September single-family production level is below a 900,000 annualized rate and the lowest level since May 2020.”

Given expectations that interest rates will remain elevated, Shepherdson expects "building permits and starts to fall further in the fourth quarter, with a floor still several months away."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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