The Census Bureau and the U.S. Department of Housing and Urban Development said that new residential construction declined sharply in June. Housing starts have been much weaker since March, when they briefly surpassed the one million mark. This most recent data found that starts were off from 928,000 in May to 836,000 in June. That was the slowest pace since August 2012.
It would be hard to ignore the role that higher interest rates might have played, particularly in June’s decline. According to Freddie Mac, the average 30-year mortgage rate has risen from 3.35 percent at the beginning of May to 3.91 percent at the beginning of June to 4.46 percent by the last week of June. Such rapid increase in rates has already begun to impact mortgage applications, with the Mortgage Bankers Association reporting a significant decline in June. To be fair, though, mortgage rates remain at historic lows overall, even with the recent rise.
In addition, much of the decline in June’s housing starts numbers stemmed from reduced new multi-family residential activity, down from 332,000 in May to 245,000 in June. As with the larger figure, the multi-family starts data were at their lowest point since August 2012. As a whole, multi-family starts have been highly volatile over the past year, peaking at 382,000 in March. New single-family residential construction edged only slightly lower for the month, down from 596,000 to 591,000. This was down from its recent peak of 620,000 in February.
At the same time, new housing permits declined from 985,000 in May to 911,000 in June. Similar to the starts data, the lower number was mostly attributable to the multi-family segment, down from 365,000 to 287,000. Single-family permitting actually rose somewhat from 620,000 to 624,000. As such, despite the lower overall numbers, single-family permits increased to their highest level since May 2008. This should provide at least some degree of comfort about future activity, as permits serve as a proxy for upcoming construction activity.
Another more-positive piece of news was yesterday’s National Association of Home Builders (NAHB) Housing Market Index (HMI) report. The index rose to 57 in July, up from 51 in June. More importantly, the last time the HMI was at this level was January 2006, and it suggests that builders have been increasing more confident over the course of the past two years. In June 2011 and June 2012, the index stood at 13 and 29, respectively. Moreover, values over 50 suggest more builders are positive than negative – a key threshold. Looking forward, the index of single-family sales over the course of the next six months rose from 60 to 67, which should bode well for growth.
Even with this more-optimistic view of the second half of the year, higher mortgage rates could dampen growth in this important sector. We will be closely watching housing starts and permits data for July to see if increased borrowing costs further ease activity.
Chad Moutray is the chief economist, National Association of Manufacturers.