New housing starts fell again in October to the lowest level in more than two years as higher mortgage rates continue to batter home builder sentiment—prompting experts to warn a recovery still seems unlikely over the next year and that a dearth of construction could lead to another housing shortage.
The number of housing starts, or new houses on which construction has started, plunged 9% from a year ago in October, while building permits fell 10% to 1.5 million, the Census Bureau reported Thursday.
Though not as weak as expected, housing starts and permits last month “continue to fall rapidly,” UBS economist Samuel Coffin said in a note to clients after the report, pointing out the overall decline shows ongoing deterioration in the housing market despite Hurricane Ian having a milder-than-projected impact on construction in the South.
The decline in starts last month has pushed construction down 21% from a peak in April, says Pantheon Macro chief economist Ian Shepherdson, positing “the bulk of the drop is over, but recovery is a long way off” and construction may not pick up until late next year.
The number of homes on the market has grown amid the collapse in demand, but in emailed comments, Lawrence Yun, chief economist for the National Association of Realtors, said new listings are lower compared to the same period one year ago and that housing inventory overall remains near “historic lows.”
“That means once the gate opens a bit for homebuyers, we could again face a housing shortage,” says Yun, adding that mortgage rates are already falling from the peak levels of last month—to 6.9% last week from a peak of nearly 7.2%—allowing more homebuyers to qualify for a mortgage and potentially spurring some demand.
Given the relatively small number of homes under construction, NerdWallet’s Kate Wood says builders could find themselves scrambling to meet demand if interest rates “significantly fall”—fueling a shortage and potentially driving up home prices that are already at record highs.
The Federal Reserve’s interest rate hikes this year spurred a forceful reversal in the housing market, which was already reeling from supply shortages holding up construction and making homes more expensive. Higher mortgage rates have tacked on an average $800 to the monthly payment for new mortgages since last year, and demand has fallen off as a result, with new home sales cratering nearly 30% this year. The new construction data comes one day after information showing builder confidence plunged for an eleventh month straight in November as rising interest rates continued to weaken housing demand—hitting the second-worst level since June 2012, after only the start of the pandemic in early 2020.
What To Watch For
The National Association of Realtors on Friday will report existing home sales for last month. Economists project about 4.4 million homes were sold on an annualized basis—down from 6.2 million in October 2021.