US housing starts surge in boost to economy

© Reuters. FILE PHOTO: Construction workers work on a home, as a subdivision of home is built in San Marcos, California, U.S., January 31, 2023. REUTERS/Mike Blake

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. single-family homebuilding surged in July and permits for future construction rose amid an acute shortage of previously owned houses, but mortgage rates climbing back to near two-decade highs could slow the housing market improvement.

The sharp rebound in groundbreaking on single-family housing units reported by the Commerce Department on Wednesday was another sign of the economy continuing to defy dire forecasts of a recession. It followed news on Tuesday that retail sales rose strongly in July, which prompted economists to upgrade their growth estimates for the third quarters.

With inflation retreating, economists did not see the flow of upbeat data leading to another interest rate hike next month.

"Housing generally has shown resilience, but Fed officials may overlook this latest news of strengthening demand in the economy when it comes to judging whether to hike rates again this year because of the progress made on the inflation front," said Christopher Rupkey, chief economist at FWDBONDS in New York.

Single-family housing starts, which account for the bulk of homebuilding, jumped 6.7% to a seasonally adjusted annual rate of 983,000 units last month. They rose 9.5% year-on-year in July. The increase in groundbreaking was led by the West, where single-family starts soared 28.5%.

Starts rose 12.5% in the Midwest. But they fell 3.4% in the Northeast and declined 1.3% in the densely populated South.

After being pummeled by the Federal Reserve's aggressive monetary policy tightening, the housing market has stabilized. Further improvement, however, looks likely to be curtailed by the renewed increase in mortgage rates.

The average rate on the popular 30-year fixed mortgage has risen to 6.96% over the past weeks, according to latest data from mortgage finance agency Freddie Mac (OTC:FMCC). The rate is within striking distance of the 7.08% seen in late October and early November, which was the highest since April 2002.

Mortgage rates near 7% were attributed to the ebb in confidence among homebuilders in August, with the National Association of Home Builders saying more builders were offering incentives to attract buyers amid expectations of lower sales.

The Fed has since March 2022 raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range. Starts for housing projects with five units or more were unchanged at a rate of 460,000 units in July. Demand for rental accommodation, largely driven by higher mortgage rates sidelining some potential home buyers, is slowing. There is also a record stock of multi-family housing under construction.

Overall housing starts increased 3.9% to a rate of 1.452 million units in July. Economists polled by Reuters had forecast starts rising to a rate of 1.448 million units.

"The need for new single-family homes, which is driven by scarce existing home inventory, should keep a floor under single-family construction," said Nancy Vanden Houten, U.S. lead economist at Oxford Economics in New York. "Homebuilders increased their use of incentives again in August, which may support sales and prevent a steep fall in single-family starts."

Permits for future construction of single-family homes rose 0.6% in July to a rate of 930,000 units. They have now increased for six straight months and were lifted by rises in the Midwest and South. Single-family building permits, however, tumbled in the Northeast and were unchanged in the West.

Permits for housing projects with five units or more fell 0.2% to a rate of 464,000 units, the lowest level since October 2020. Overall building permits edged up 0.1% to a rate of 1.442 million units last month.

Stocks on Wall Street were higher. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

TIGHT SUPPLY

Despite the rise in starts, housing supply is likely to remain tight. The number of houses approved for construction that are yet to be started fell 0.4% to 277,000 units in July.

The single-family homebuilding backlog dropped 0.7% to 140,000 units, while the completions rate for this segment increased 1.3% a rate of 1.018 million units. Overall housing completions dropped 11.8% to a rate of 1.321 million units.

The inventory of single-family housing under construction fell 0.7% to a rate of 678,000 units.

The stock of multi-family housing under construction increased 1.1% to 986,000 units, the highest level since the government started tracking the series in 1970.

Realtors estimate that housing starts and completion rates need to be in a range of 1.5 million to 1.6 million units per month to plug the inventory gap.

There was encouraging news on the industrial side of the economy, which has been bruised by the U.S. central bank's rate hikes. Output at factories rebounded 0.5% in July after declining 0.5% in June, the Fed said in a separate report.

The rebound was driven by a 5.2% acceleration in motor vehicle and parts production. But this partly reflected difficulties adjusting the data for seasonal fluctuations. Production typically falls in July when automakers idle plants for retooling. However, the temporary plant closures do not always happen, which could throw off the model that the Fed uses to strip out seasonal fluctuations from the data.

Output at mines rose. Utilities production soared 5.4% after three straight monthly declines as a heat-wave across many parts of the country increased demand for air conditioning.

As a result, industrial production shot up 1.0% after dropping 0.8% in June.

"We don't think these strong July increases are fully representative of the underlying trends, because it looks like temporary factors helped boost the July readings," said Daniel Silver, an economist at JPMorgan (NYSE:JPM) in New York.

Nevertheless, the rise in industrial output bodes well for third-quarter gross domestic product. Economists at Goldman Sachs (NYSE:GS) raised their third-quarter GDP tracking estimate by 0.2 percentage point to a 2.4% annualized rate, citing the strong increases in motor vehicles and utilities production.

The economy grew at a 2.4% pace in the second quarter.