For the first time in more than a decade, housing starts are on a dramatic rise, and it appears that the housing market is seeing benefits from the Federal Open Market Committee and Federal Reserve interest rate cuts. These new policies have lowered mortgage rates significantly.
"The combination of historic low unemployment, low-interest rates, and low housing stock inventory bodes well for the new home construction market and affiliated industries," says Ed Gillette, CEO of SGC Horizon.
A new joint report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development showed an increase in privately-owned housing starts to an annual rate of 1.36 million in August. That number is 12.3 percent above the revised July estimate of 1.22 million and 6.6 percent higher than the rate of 1.23 million in August of 2018.
According to the Commerce Department, this is the highest level in home building the U.S. has seen since June of 2007. These numbers also outpaced predictions by economists polled by MarketWatch, who predicted a 1.26 million rate for August starts. The growth in new-home construction has gone up across the country, except for the West, which saw numbers remain the same from July to August.
Overall, housing starts for August were boosted by a rise in the construction of multifamily housing. The rate of construction for buildings with five units or more was 424,000, a jump of 30 percent. Single-family home construction reached a rate of 919,000, which is 4.4 percent above the revised July estimate of 880,000. Although 4.4 percent seems small, it's still a sign of signification growth – marking August as the strongest month for single-family housing starts since January.
Building permit authorizations in the single-family and multifamily sectors also went up in August. Combined rates rose to a seasonally adjusted annual rate of 1.42 million, which put them 7.7 percent higher than the July rate of 1.32 million and 12 percent higher than the August of 2018 rate of 1.27 million. Single-family authorizations were at 866,000, a 4.5 percent increase from the July rate of 829,000. In multifamily buildings with five units or more, authorizations were at 509,000, an increase of 13.3 percent.
"All of the positive key metrics for the single-family and multifamily markets have driven the market to decade-high activity," says Tony Mancini, Group Director and Principal of SGC Horizon. "This is fantastic news for homebuilders and product manufacturers as they gear up for 2020."
Worries over the impact of a trade war with China on buyer confidence appear to be offset by dropping mortgage rates, a trend that has continued throughout the summer. Interest rates on a 30-year-mortgage averaged 3.49% in the first week of September, which is a percentage point less than they were one year earlier. Shorter-term mortgage rates have also gone down. The average interest rate on a 15-year fixed-rate mortgage dropped to 3 percent, which is the lowest it has been since 2016.
Falling mortgage rates have improved housing affordability and allowed more potential homebuyers to enter the market, giving the struggling housing market a boost. Things look promising for builders as the demand for housing is likely to rebound in the coming months. New buyers entering the market will drive up demand, especially at the entry-level home market.