U.S. housing starts drop to lowest level since June 2020

So-called housing starts fell to a 1.28 million annual pace from 1.45 million in August, the government said Tuesday. That’s how many houses would be built over an entire year if construction took place at the same rate every month as it did in August.

Economists on Wall Street were expecting a drop in starts to 1.43 million. All numbers are seasonally adjusted. 

Housing starts peaked at 1.8 million in April 2022. 

The number of homes started in July was revised downwards, to an increase of 2% to 1.45 million, from an initial reading of a 3.9% gain. 

More from MarketWatch: Meet the brave Americans buying and selling their homes, despite stubbornly high interest rates

New homes have dominated the housing market, but persistently high rates are beginning to spook home builders. In anticipation of waning demand, builders said they’ve started to ramp up price cuts to boost buyer demand in September, according to a survey by the National Association of Home Builders. 

Building permits, a sign of future construction, rose 6.9% to a 1.54 million rate. That’s the highest level since October 2022.

Key details: The construction pace of single-family homes fell by 4.3% in August, and apartment-building construction fell by 26.3%.

But home builders ramped up single-family home construction in the South, where starts rose by 8.1% in August.

Housing starts fell the most in the West, by 28.9%.

Permits for single-family homes rose 2% in August, while permits for buildings with at least five units or more surged by 14.8%.

Around 1.69 million homes were under construction as of August. 

Big picture: Builders are increasingly concerned about how 7% rates will impact demand, and they’re pulling back on starting new developments as a result. 

Builder confidence in September fell to the lowest level in five months, according to the NAHB. Home builders are increasingly offering incentives, including cutting prices. The share of builders cutting prices to boost sales rose to the highest level in nine months, the NAHB noted, going up to 32% in September from 25% the previous month.

Nonetheless, given the long-term need for housing and a decade of underbuilding, builders may not see a sustained drop in demand. 

What are they saying? Despite starts falling sharply in August, the uptick in building permits “suggests housing starts could pick up modestly again and today’s data could reflect some volatility,” CIBC Economics said in a note. “Nonetheless, the cooling in building activity is a good sign for the Fed which is expecting to limit housing market activity in an effort to contain inflation.”

Rates have peaked, but “will remain elevated for the rest of the year,” Capital Economics wrote in a note. And this means that with “a slowing economy, we expect this will lead single-family starts to flatten-off at around 900,000 annualised until mid-2024, after which an economic recovery will help spur buyer demand and supporting renewed homebuilder confidence,” they added.

Market reaction: U.S. stocks
DJIA

SPX
were set to open higher early Tuesday. The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
rose above 4.3%.