Housing starts rose 7.0% in September due to a rebound in multifamily homes, according to government data released on Wednesday, partly offsetting the sharp drop in August. Still, new residential starts remained a drag on growth in the third quarter amid higher mortgage rates, falling 4.2% on a quarterly basis.
Earlier this year, we believed the housing market already hit a bottom. However, mortgage rates surged because of the spike in long-term yields. That spike stemmed from the Federal Reserve’s signal that interest rates would be higher for longer, even though there was no additional hike during the quarter.
With home sales likely reaching a new bottom this week, the bottom call seems premature at the moment.
Also, the increase in housing starts is not likely going to last, as the data on building permits—the proxy for future housing starts—dropped 4.4%. The decline was driven by multifamily homes, suggesting a quick reverse to the downside in new starts for the group in the coming months.
Looking ahead, it should take home buyers a long time to adjust to the new “normal” mortgage rate. The rate will stay elevated for years, even after the Fed begins to cut rates—unless a recession takes place. That means housing demand should run below trend for quite some time, even though we are in a housing deficit.
On the other hand, this environment should keep prices from rising further, adding more disinflation to the pipeline toward a soft landing.
We don’t think that the housing market will show a clear and sustainable sign of rebounding until at least the middle of 2024, when we predict the Fed will begin to cut rates.
Inside the data, housing completions rose 6.6% in September as both single and multifamily homes advanced. Housing starts rose the most in the Midwest, while all other regions showed declines on a non-seasonally adjusted basis.
For more insights on real estate and construction, check out RSM’s real estate industry outlook.
