July 19, 2022

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Single-Family Home Construction Retreat Continued in June

Total housing starts fell to a 1.559 million annual rate in June from a 1.591 million pace in May, a 2.0 percent drop. From a year ago, total starts are down 6.3 percent. Total housing permits also fell in June, posting a 0.6 percent drop to 1.685 million versus 1.695 million in May. Total permits are still up 1.4 percent from the June 2021 level.

Starts in the dominant single-family segment posted a rate of 982,000 in June versus 1.068 million in May, a drop of 8.1 percent. That is the slowest pace and first month under one million since June 2020. Starts are down 15.7 percent from a year ago (see first chart). Single-family permits fell 8.0 percent to 967,000 versus 1.051 million in May, also the slowest pace and first month under one million since June 2020 (see first chart).

However, starts of multifamily structures with five or more units increased 15.0 percent to 568,000 and are up 16.4 percent over the past year while starts for the two- to four-family-unit segment plunged 69.0 percent to a 9,000-unit pace versus 29,000 in May. Total multifamily starts were up 10.3 percent to 577,000 in June, showing a gain of 15.6 percent from a year ago (see first chart).

Multifamily permits for the 5-or-more group rose 13.1 percent to 666,000 while permits for the two-to-four-unit category decreased 5.5 percent to 52,000. Total multifamily permits were 718,000, up 11.5 percent for the month and up 26.0 percent from a year ago (see first chart).

Meanwhile, the National Association of Home Builders’ Housing Market Index, a measure of homebuilder sentiment, fell again in July, coming in at 55 versus 67 in June. That is the seventh consecutive drop and the second-largest monthly decline in the index’s history, putting the result at the lowest reading since May 2020. The index is down sharply from recent highs of 84 in December 2021 and 90 in November 2020 (see second chart).

According to the report, “Builder confidence plunged in July as high inflation and increased interest rates stalled the housing market by dramatically slowing sales and buyer traffic.”  The report adds, “In another sign of a softening market, 13% of builders in the HMI survey reported reducing home prices in the past month to bolster sales and/or limit cancellations.”

All three components of the Housing Market Index fell again in July. The expected single-family sales index dropped to 50 from 61 in the prior month, the current single-family sales index was down to 64 from 76 in June, and the traffic of prospective buyers index sank again, hitting 37 from 48 in the prior month (see second chart).

Input costs are still a concern for builders though lumber and copper prices have declined from recent highs. Lumber recently traded around $650 per 1,000 board feet in mid-July, down from peaks around $1,700 in May 2021 and $1,500 in early March 2022. Copper prices were down to $7,400 per metric ton (see third chart).

Mortgage rates have eased back recently, with the rate on a 30-year fixed rate mortgage coming in at 5.50 percent in mid-July versus 5.80 percent in late June. However, rates are still about double the lows in early 2021 (see fourth chart).

While the implementation of permanent remote working arrangements for some employees may have been providing continued support for housing demand, record-high home prices combined with the surge in mortgage rates and falling consumer attitudes are working to weaken demand. Pressure on housing demand combined with elevated input costs is sending homebuilder sentiment plunging. The outlook for housing is deteriorating rapidly.