Economic Report: U.S. housing starts rise ‘unexpectedly’ for the second straight month

The numbers: Construction of new homes rose 1.9% in October, as builders amped up new projects.

The pace of construction increased as builders saw a pressing need for more housing units, with the resale market continuing to deal with a shortage.

Housing starts rose to a 1.37 million annual pace from 1.35 million in October, the government said Friday. That’s how many houses would be built over an entire year if construction took place at the same pace every month as it did in October.

The data exceeded expectations on Wall Street, where the expected rate was 1.35 million. The numbers are seasonally adjusted.

Housing starts are down from a peak of 1.8 million in April 2022.

Both single-family and multi-family construction increased in October.

Despite newly built homes becoming more popular among buyers amid an ongoing inventory shortage of existing homes, builders are sensitive to rising rates, and they have ramped up price cuts and other incentives in November.

Building permits, a sign of future construction, rose 1.1% to 1.49 million in October. 

Key details: The construction pace of single-family homes rose by 0.2% in October, and apartment construction rose by 4.9%.

Home builders ramped up construction of single-family homes in the Midwest and West, with starts rising by 12% in each of those regions.

Housing starts fell the most in the Northeast, by 14.5%.

Permits for single-family homes rose 0.5% in October, while permits for buildings with five or more units went up by 2.2%.

Around 1.67 million homes were under construction as of September. 

Big picture: Looking ahead, home-builder confidence was falling in November on the back of mortgage-interest rates approaching 8%, but it is likely to get back on track, as rates appear to be dropping as the U.S. economy slows.

With rates falling, buyer demand is likely to bounce back. And given that builders are among the few who are adding new housing stock, they may ramp up starts in the months to come, barring any major weather events.

What are they saying? “This morning, housing starts unexpectedly rose 1.9% in October, pulling the annual pace up … [to] a three-month high,” analysts at Stifel Economics wrote in a note.

“Broadly, while the demand for homes has weakened in line over the past year to 18 months with the ascent of mortgage rates and home prices, builders are generally looking beyond the near-term and are well aware that there is a structural shortage of housing in the U.S.,” Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, wrote in a note.  

“Thus, despite rising financing costs, they are likely to want to maintain a certain pace of output regardless of how soft demand gets in the near term,” he added.

Market reaction: U.S. stocks

were mixed early Friday. The yield on the 10-year Treasury note
rose above 4.4%.

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