The decline in new construction comes as mortgage rates last week fell to their lowest level since October. The pace of new construction continued to slow in August as falling mortgage rates offer a glimpse of hope for the moribund housing market.
The Census Bureau and the Department of Housing and Urban Development on Wednesday said that building permits fell by 3.7% in August to an annual level of 1.3 million. That is 11.1% lower than a year ago.
Housing starts dropped 8.5% to an annual level of 1.3 million units, down 6% from the same period in 2024. The report came a few hours ahead of the Federal Reserve’s announcement of an interest rate cut.
The Fed has become more concerned with the softening labor market in recent weeks, more so than inflation that remains above the central bank’s 2% annual target. But there are also worries about the state of the housing market. The National Association of Home Builders/Wells Fargo Housing Market Index released recently showed sentiment among home builders was unchanged in September from August. However, there was improvement in the outlook for the future, given the recent drop in mortgage rates. The average interest rate on a 30-year fixed rate loan fell to 6.39% last week, its lowest level since October.
“While builders continue to contend with rising construction costs, a recent drop in mortgage interest rates over the past month should help spur housing demand,” said NAHB Chairman Buddy Hughes, a home builder and developer from Lexington, North Carolina.
“Builders are holding back as the inventory of new homes for sale keeps growing and new home prices are stagnating, reflecting slower demand,” said Lisa Sturtevant, chief economist at Bright MLS. “A pullback in residential building activity has historically preceded an economic recession.”
“Residential real estate is a key component of the U.S. economy, accounting for about 15-18% of gross domestic product,” Sturtevant added. “When home building slows, it has a ripple effect across the economy. Declining new construction also reflects less consumer demand and indicates that overall consumer spending could be waning.”
