U.S. single-family homebuilding surged in July, and permits for future construction rose amid an acute shortage of previously owned houses. The sharp rebound in residential construction boosted the economy. But rising mortgage rates limit the number of buyers willing to brave the current pricing and may slow the housing market’s improvement.
The Commerce Department reported on Wednesday that new single-family homes were being built at a rate of 782,000 units, up a touch from April but still well below the year-ago pace of 968,000. The rise in single-family homebuilding reflects the growing demand for housing as young adults leave their parent’s basements and enter the workforce. The surge in housing starts also fueled the Commerce Department’s estimate that second-quarter gross domestic product (GDP) will grow at a 2.1% annualized rate, up from the previous estimate of 1.8% growth.
Construction of other types of dwellings also jumped, but at a slower pace than the rate for single-family homes. Builders started construction on apartments and other multifamily housing at a rate of about 460,000 units in July, up from the prior month but below the year-ago pace of 675,000. The surge in housing starts will boost construction jobs and also support economists’ expectations that the unemployment rate will continue to fall, further fueling consumer spending and economic growth.
Despite the gains, the current pace of homebuilding is still below what it needs to be to keep up with demographic demand. Millennials, who are now entering the workforce and beginning to form families, are expected to account for most of the nation’s homebuying in the coming years. Still, the housing market is not keeping up with this demand because it can’t afford to build enough new houses.
Meanwhile, mortgage rates have continued to climb to near two-decade highs, which are crimping affordability for prospective homeowners. According to data from mortgage buyer Freddie Mac, the average 30-year mortgage rate was 6.94% in October. That’s up from 4.72% in April, when the market was still recovering from the September 11 terrorist attacks and six years away from the 2008 financial crisis that triggered the Great Recession.
The upbeat news on housing starts bolstered the case for continuing economic strength and was augmented on Wednesday by stronger-than-expected retail sales and industrial output data. The largely positive news on the economy is helping to recast the picture of the Federal Reserve, which is widely expected to resume raising interest rates at its next meeting this week. The Fed has said it expects to increase rates at least three times this year and may increase them even more in 2022. A strong job market, steady consumer spending, and higher corporate investment will all help the economy sustain its healthy pace of growth. Economists believe the economy’s underlying fundamentals are strong enough to withstand another rate hike this week, but a further jump in borrowing costs could hurt growth. The central bank has said it will be patient in deciding how much to raise rates.