U.S. housing starts continue to fall amid rate hikes

REAL ECONOMY BLOG | October 19, 2022

Authored by RSM US LLP

New housing starts fell by 8.1% in September as the impact of rising mortgage rates worked through the housing market, the Census Bureau reported on Wednesday.

There were 1.4 million housing starts on an annualized basis in September, significantly lower than the 1.7 million that we see as needed to meet long-term demand.

Since the start of the year, the Federal Reserve’s campaign to tame inflation with higher interest rates has brought housing starts down by more than 18%. With more rate hikes coming as inflation proves to be persistent, we should expect starts to fall further.

It is no surprise that the pullback in housing supply has been caused by falling demand for housing almost everywhere.

But that does not mean housing prices will show a decline anytime soon. Prices have decelerated, but it will most likely take six to 12 more months for price growth to fall to negative territory. Housing prices in August continued to grow by 7.7% on a year-ago basis, according to the National Association of Realtors.

There is also a lag between housing prices and the shelter components inside the consumer price index and personal consumption expenditures index. It can take up to 16 months for the impact of rising rates to show up on those reports.

With the shelter component accounting for one third of total spending in the CPI, we expect that inflation will not show any meaningful slowdown earlier than the first quarter of next year.

That is aligned with our forecast of a potential slowdown in rate hikes around the first quarter.

Inside the data

Inside the report, building permits, a proxy for future housing starts, rose by 1.4% in September after dropping by 8.5% in August. The upside surprise was driven by multifamily homes, which increased by 7.8%. Single-family homes, however, continued to drop on the month, falling by 3.1%.

Completions were up by 6.1% on the month, catching up with starts and permits. In the past two cycles, whenever housing completions have caught up with permits and starts, it signaled a housing recession. This time is no exception.