New US home construction rose unexpectedly in August, though the slowest pace of building permits in more than two years underscores how higher mortgage rates are weighing on demand.
Residential starts increased 12.2% last month to a 1.58 million annualized rate, led by a jump in multifamily projects, according to government data released Tuesday. The pace of starts topped all estimates in a Bloomberg survey of economists.
Applications to build, a proxy for future construction, declined to an annualized 1.52 million units, the fewest since June 2
The drop in building permits shows how residential construction is coming under pressure as higher borrowing costs and elevated prices compound affordability challenges and weigh on sales. The average 30-year fixed mortgage rate last week exceeded 6% for the first time since the housing-market downturn in 2008.
Borrowing costs have climbed as Federal Reserve policy makers step up efforts to contain persistently high inflation. On Wednesday, the Fed is expected to boost rates by 75 basis points for a third straight meeting.
As a result, builders are becoming increasingly gloomy in their assessment of the housing market. A report Monday showed homebuilder sentiment fell for a ninth straight month in September, the longest stretch of declines on record.
A small gain in the pace of single-family starts shows “home builders continue to moderate their production levels as the cost of construction materials remains at elevated levels and buyers react to rising mortgage rates,” Kelly Mangold of RCLCO Real Estate Consulting, said in a note.
“While there is no lack of demand from households seeking to purchase, many of these same buyers cannot afford the high prices these new homes command with mortgage rates where they stand today,” Mangold said.
The government’s report showed single-family housing starts rose 3.4% to an annualized 935,000 rate, representing just the second gain this year. Meanwhile, construction of multifamily dwellings jumped 28% in August to a 640,000 pace.
The number of total homes authorized for construction but not yet started declined.
Existing-home sales for August will be released Wednesday, followed by new-home purchase data next week.