Housing starts and building permits pulled back in September after a red-hot August, suggesting that the road to a housing market rebound won’t be smooth, even as interest rates drop.
The market remains demand-driven, with the current and future supply of new homes staying below the threshold for a sustainable, non-inflationary equilibrium—around 1.7 million starts annually.
September’s housing starts came in at 1.35 million, down 0.5% from August, while building permits, a proxy for future projects, fell by 2.9% to 1.4 million.
We believe the bottom in starts and permits may have passed, and it is more likely than not that we are at the beginning of an upward trend as the Federal Reserve lowers interest rates.
But we do not expect the market to regain the kind of growth seen during the pandemic when the policy rate was near zero.
Read more of RSM’s insights on housing, the economy and the middle market.
The takeaway
As the Fed aims for a 3% long-term neutral rate, housing growth should rebound but at a more modest pace. Even with that rebound, the housing shortage and consequent unaffordability will most likely persist into next year.
While the level of housing completions has increased to around 1.7 million on average in recent months (1.68 million in September), the market remains more than 3 million homes short of meeting current and near-term demand.
Given that the Fed has limited tools to balance the housing market, government policies should take center stage after the election.
