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Housing starts and permits drop in October

House construction in the U.S. declined in October more than expected, while the number of permits for single-family homes tumbled, another sign of growing reluctance among home builders to increase inventory as many buyers are pushed out of the market.

Residential starts — including both single- and multi-family units — decreased 4.2% last month to a 1.425 million annualized rate, according to government data released Thursday. Economists surveyed by Bloomberg had forecast a 2.0% decline.

Single-family homebuilding dropped 6.1% to an annualized rate of 855,000 units. Construction of multifamily dwellings also declined.

Applications to build — an indication of future expected activity — slid 2.4% to an annualized rate of 1.526 million units in October from 1.564 million units the prior month. Still, that's higher than the Bloomberg consensus expectation of 1.515 million. Permits for construction of single-family homes fell to 839,000 units in October.

While there are signs that inflation may cool even further in the coming months, housing activity remains muted by the Federal Reserve's push to tackle soaring inflation. The central bank's efforts have caused borrowing costs including mortgages to be increasingly expensive and have heightened the risk of a recession.

"The price of labor and materials remains elevated, and these higher costs are being passed on to the consumer in the form of higher new-home prices during a time when affordability is down. Builders are trying to attract potential home buyers by cutting prices and offering incentives, but are limited by these high material and labor costs," Odeta Kushi, deputy chief economist at First American, wrote in a statement.

Homes are seen under construction near Wigwam Avenue and Rainbow Boulevard on Monday, Sept. 19, 2022, in Las Vegas. (Chase Stevens/Las Vegas Review-Journal) @csstevensphoto
Homes are seen under construction near Wigwam Avenue and Rainbow Boulevard on Monday, Sept. 19, 2022, in Las Vegas. (Chase Stevens/Las Vegas Review-Journal) @csstevensphoto

Homebuilder sentiment has declined every month this year, and is now at its worst level since June 2012, with the exception of the onset of the pandemic, according to the National Association of Home Builders/Wells Fargo Housing Market index released Wednesday.

Builders are pulling out the stops to lure in buyers who are reluctant in the face of higher mortgage rates, which topped 7% last week for the 30-year fixed rate.

For instance, nearly 3 in 5 builders say they are offering incentives this month. In November, 25% of builders are paying mortgage points for buyers to lower their rate, up from 13% in September. Mortgage rate buy-downs increased from 19% to 27% over the same period.

Additionally, 37% of builders cut prices this month, up from 26% in September. The average price reduction was 6%, which is below the 10% to 12% cuts seen during the Great Recession.

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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