Homebuilding Struggles to Break Out of Funk

October 18, 2018

The housing market may be in search of much-needed inventory, but it’s not likely to come from new home construction. Builders broke ground on fewer homes in September. Housing starts dropped 5.3 percent to a seasonally adjusted annual rate of 1.2 million, the Commerce Department reported Wednesday.

Homebuilding struggles

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Broken out, single-family housing starts dropped 0.9 percent to 871,000 units, while multifamily starts—those for apartment buildings and condos—plunged 15.2 percent to 330,000. Overall housing permits—an indicator of future housing production—dropped 0.6 percent last month.

Some economists are blaming the softening on higher mortgage rates that are biting into housing affordability. Mortgage rates are nearing the 5 percent average. Also pressing into affordability are the builders who have had to raise their prices on buyers due to labor shortages and increases in material costs. The National Association of Home Builders does point to a decline in lumber prices recently but material costs and a high number of unfilled construction jobs continues to plague the market.

Robert Dietz, chief economist for the National Association of Home Builders, says the trade group is still optimistic for a gradual strengthening in the single-family sector, regardless of this summer’s soft patch. “A growing economy coupled with positive demographics for housing should keep the market moving forward at a modest pace in the months ahead,” Dietz says.

Despite last month’s drop, builders, however, do point out that homebuilding is still 3.7 percent higher than a year ago. But several economists aren’t convinced that homebuilding is any better off than last year.

“The overall trend in housing has clearly slowed/plateaued/leveled off,” Jennifer Lee, senior economist for BMO Capital Markets, told MarketWatch.

The U.S. Commerce Department’s report showed that single-family and multifamily housing starts did see big increases in the Northeast and Western regions last month. In the Northeast, housing starts rose 29 percent and by 6.6 percent in the West. However, homebuilding softened by 14 percent month over month in the Midwest and by 13.7 percent in the South.