Housing Starts Reach Highest Level Since May
New U.S. home construction experienced a significant rebound in November, driven by the decline in mortgage rates that attracted consumers back into the housing market. According to the latest data released by the Commerce Department on Tuesday, housing starts jumped by 14.8% last month, reaching an annual rate of 1.56 million units. This marks the highest level since May and surpasses economists’ forecast of 1.36 million units, as reported by Refinitiv.
Low Inventory and Falling Mortgage Rates Drive Demand
The surge in housing starts can be attributed to several factors. One of the key drivers is the low inventory of existing homes on the market, which has created an opportunity for new construction. As Jeffrey Roach, chief economist at LPL Financial, stated, “Investors have clearly rewarded homebuilders as low inventory of existing homes on the market has created an opportunity for new construction.” Additionally, falling mortgage rates have ignited demand, with rates currently at their lowest since July.
However, despite the strong performance in housing starts, applications to build, which measure future construction, declined in November. They fell by 2.5% over the course of the month, reaching an annualized rate of 1.46 million units. Nevertheless, when compared to the same period last year, building permits are up by approximately 4.14%.
Builders Remain Optimistic, Reflecting a Shift in Market Sentiment
The release of this data follows the recent increase in the National Association of Home Builders/Wells Fargo Housing Market Index. The index, which measures the pulse of the single-family housing market, rose by three points to 37. This rise comes after a six-point drop in November. It is important to note that any reading below 50 is considered negative.
Analysts believe that the improvement in market sentiment among builders is a result of the decline in mortgage rates. Alicia Huey, NAHB chair and a custom home builder and developer from Birmingham, Alabama, stated, “With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look.”
Mortgage Rates Retreat, Boosting Affordability for Buyers
Sentiment among builders had been steadily declining since the end of the summer when mortgage rates exceeded 7%, leading to a decrease in demand from potential homebuyers. However, borrowing costs have since retreated as investors believe that the Federal Reserve has concluded its aggressive interest-rate hike campaign.
Currently, the rates on the popular 30-year fixed mortgage are hovering around 6.95%, according to Freddie Mac. While this is down from a high of 7.79% at the end of October, it is still significantly above the pre-pandemic average of 3.9%.
Nicole Bachaud, Zillow senior economist, expressed optimism about the market, stating, “Mortgage rates have continued to float down in the early weeks of December, so this momentum should continue through year-end, welcome news for buyers who have been unlocked by affordability to enter the market once again.”
Overall, the surge in housing starts, combined with the decline in mortgage rates, paints a positive picture for the U.S. housing market, providing opportunities for both builders and buyers.