Housing starts and permits dropped in June after surging in May amid market volatility because of interest rate increases.
New residential starts fell by 8% on the month, while permits for new buildings declined by 3.7%, the Commerce Department reported on Wednesday. The drop came as mortgage rates rose in June to 6.71% from 6.57% earlier.
Given a near-7% mortgage rate in July, we should see further declines in starts and permits in the next release.
But from a longer-term perspective, housing starts remained on an upward path since April on a six-month average basis, rising to 1.42 million in June. Building permits also rose on a three-month moving average to 1.45 million, picking up from the bottom in January.
It is likely that, barring unexpected shocks, we have passed the bottom regarding housing starts and permits despite the sharp drop in June.
Read more perspectives in RSM’s outlook for the real estate industry.
The market’s recovery path will remain bumpy as uncertainties continue to surround interest rates. We should see another 25-basis-point hike next week, and the market is not entirely convinced that July will be the last time the Fed tightens monetary policy.
Our base case is pointing to a “one and done” July hike as disinflation and an economic slowdown take hold for the rest of the year. As a result, mortgage rates should ease soon, improving builders’ sentiment.
June’s housing starts data is a key component in the calculation of gross domestic product for the second quarter which will be released by the end of the month.
While June’s number came out slightly lower than expected, the significant downward revision to May’s figure from 21.7% to 15.7% should add some downside risks to our forecast of GDP growth at 1.7%.
Inside the report, homes under construction rose slightly, by 0.1%, increasing for the first time since December. Completions fell by 3.3% after surging by 7.2% in May.
