Higher mortgage rates have increased recession risk by targeting the one sector that always falls before every recession: residential construction workers. And higher rates are also impacting the future supply of homes, as housing permits have been in a downtrend for a while.
Single-family permits fell again in today’s housing starts report. Of course, the one solution that can change the tide for this concerning downtrend is lower mortgage rates. We have had a decent move lower in rates recently, and the builder’s confidence looking out six months had a slight uptick this week. But even with all that, single-family permits fell again, something I discussed on CNBC this morning before the report came out.
Let’s take a look at the concerning trend in single-family permits.
Building permits
From Census: Building Permits: Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,446,000. This is 3.4 percent above the revised May rate of 1,399,000 but is 3.1 percent below the June 2023 rate of 1,493,000. Single-family authorizations in June were at a rate of 934,000; this is 2.3 percent below the revised May figure of 956,000. Authorizations of units in buildings with five units or more were at a rate of 460,000 in June.
Single-family permit data has been falling for months since mortgage rates rose toward 7.5% earlier in the year. We must remember that many smaller homebuilders don’t have the financial capacity of the bigger, publicly traded builders and can’t pay down rates as quickly so it’s not surprising that single-family permits have been falling.
Housing permits, in general, haven’t looked healthy for a while now, led by the collapse in 5-unit permits, with single family permits joining them in the recent downturn. However, we did see a boost in the 5-unit permits on a month-to-month basis in this report, which was working from the COVID-19 recession low levels.
Hopefully, mortgage rates continue to move lower, which would stop the decline in builder’s confidence data. Once that happens, a single-family permits should follow higher as they have for many years.
Housing starts
Housing Starts: Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,353,000. This is 3.0 percent (±10.5 percent)* above the revised May estimate of 1,314,000 but is 4.4 percent (±12.7 percent)* below the June 2023 rate of 1,415,000. Single-family housing starts in June were at a rate of 980,000; this is 2.2 percent (±12.1 percent)* below the revised May figure of 1,002,000. The June rate for units in buildings with five units or more was 360,000.
Housing starts are far from the recent peak in 2022, which isn’t shocking considering our current trajectory of housing permits, as the chart below shows. In the past, we only had 5-unit permits falling, but now the concerning variable is that single-family permits are falling too, which makes it a double negative impact.
Housing completions
Housing completions: Privately-owned housing completions in June were at a seasonally adjusted annual rate of 1,710,000. This is 10.1 percent (±10.6 percent)* above the revised May estimate of 1,553,000 and is 15.5 percent (±12.6 percent) above the June 2023 rate.
Housing completion data is picking up and the faster the builders finish their historic backlog of homes, the sooner construction workers are unemployed. According to the Census report, it takes an average of 21 months to finish a 5-unit project. I am hoping that we can see some permit growth over the next 12 months so that once the backlog is done, we can continue building homes in America. Otherwise we will fall into the standard economic cycle rut of higher mortgage rates destroying the future production of homes.
Today’s theme is the need for lower mortgage rates to boost the permit data for single-family and five-unit construction. I am very pro-supply as supply is the best way to defeat inflation. We have had times in our economic history when we needed higher rates to cool demand, like in February 2021. However, that time has passed and keeping rates elevated now defeats the housing construction supply story.
