Single-Family Starts Hit 8-Month Low As Interest Rates Jump

Investor's Business Daily

The spike in mortgage rates that has slowed purchasing and refinancing activity may now be hitting construction on new single-family homes, with starts and permits down in July.

Total housing starts reached an annualized pace of 896,000 last month, up 5.9% from June, the Commerce Department said Friday. That's about in line with forecasts for 900,000.

But single-family starts fell 2.2% to their lowest level since November. Construction on housing with five or more units, a more volatile category, jumped 25.5% after plunging 25.7% in June.

In a sign of future activity, total permits were up 2.7%. But single-family permitting dropped 1.9%, the biggest decline in 16 months after growth decelerated in the prior two months.

The weakness comes as the rate on the 30-year fixed-rate mortgage has shot up to 4.56% in the Mortgage Bankers Association's latest weekly gauge from 3.59% just three months ago, on expectations the Federal Reserve will soon scale back monetary stimulus.

Applications for loans to buy a home have fallen 17.2% since early May.

Shakier Ground

The decline in single-family starts is likely due to fewer contracts being signed, and the slowdown in permitting is an indication of growing caution about the future, said Joel Naroff, president of Naroff Economic Advisors.

"They're not comfortable they're going to sell those homes," he said.

Meanwhile, multifamily construction has longer lead times and is less sensitive in the short term to rate changes. Contractors have already locked in payments for apartment work, Naroff noted.

While the latest confidence index from the National Association of Home Builders rose to the highest level since late 2005, he thinks optimism among multifamily builders may be masking more uncertainty among single-family builders.

Demand for apartments also has been strong as many Americans remain unwilling or unable to buy a home. And after hunkering down with parents and friends during and after the recession, more young people are seeking their own living spaces as job prospects gradually improve.

Homebuilders like Lennar (LEN) are focusing more on multifamily projects too. Lennar rose 2% Friday, a second straight advance from a 2013 low. PulteGroup (PHM) also rose. But D.R. Horton (DHI) and Toll Bros. (TOL) retreated.

But other signs point to slower overall construction. Sales at building supply retailers have fallen for the last two months, and the University of Michigan's consumer confidence gauge fell in August by the most since December.

More construction on new homes is seen as the key to alleviating the tight supply of properties on the market. Continued weakness in single-family starts could send home prices higher. Combined with higher mortgage rates, that would erode affordability further.

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