July 2024 Housing Starts at Lowest Level Since 2020 as Mortgage Rates Remain High

Key Takeaways

• Housing starts fell in July to the lowest level since May 2020 in the early days of the pandemic.
• High mortgage rates have driven buyers from the market and discouraged builders from beginning construction.
• A recent drop in mortgage rates, with more possibly on the horizon, could change the outlook.

Not since the early days of COVID-19 have homebuilders started so few projects as they did in July.

If homebuilders started projects all year long at the same rate they did in July, they’d begin building 1.24 million homes, down from 1.33 million in June, the Census Bureau said Friday. That was the slowest seasonally adjusted annual rate since May 2020 shortly after the pandemic began.

According to surveys of homebuilders, the outlook for business this summer has been stifled by high mortgage rates, the result of the Federal Reserve’s campaign of interest rate hikes that began in 2022.

With rates hovering near 7% for most of the summer, buyers have struggled to afford monthly payments, and many would-be homeowners have dropped out of the market. Homebuying is especially daunting when comparing today’s high rates with the ultra-low interest offered during the pandemic.

Lower Mortgage Rates Could Provide a Boost

That all could change, however: Mortgage rates dropped significantly earlier this month, and stayed relatively low at 6.49% last week, according to Freddie Mac. With rates having fallen, and the prospect of further declines on the horizon, the outlook for homebuilding is looking up.

“As mortgage rates begin to fall, many potential homebuyers will come off the sidelines and begin to look for new homes,” Joel Berner, senior economist at Realtor.com, said in a press release. “For buyers looking to purchase a home, new construction may be more feasible than they expect after a year of increased new home completions and decreased levels of new home sales.”

Despite the recent slump in housing starts, there is optimism that the market will rebound as mortgage rates become more favorable for buyers. The drop in rates is expected to entice potential homebuyers who have been waiting on the sidelines due to affordability concerns.

The Impact of High Mortgage Rates

The impact of high mortgage rates on the housing market cannot be understated. The Federal Reserve’s campaign of interest rate hikes has resulted in rates reaching near 7% during the summer months. This has made it increasingly difficult for buyers to afford monthly mortgage payments, leading many to drop out of the market altogether.

Comparing today’s high rates with the historically low interest rates offered during the pandemic only exacerbates the affordability issue. Buyers who were once eager to enter the market have been deterred by the significant increase in mortgage rates.

Looking Ahead

The recent drop in mortgage rates is a positive sign for the housing market. With rates falling and the potential for further declines, homebuilders are hopeful that the outlook for business will improve. Lower mortgage rates will likely encourage potential homebuyers to reenter the market and explore new construction options.

Joel Berner, senior economist at Realtor.com, believes that new construction may be more feasible than expected for buyers looking to purchase a home. The increased completion of new homes and decreased levels of new home sales over the past year have created opportunities for buyers to find affordable options in the market.

While the July 2024 housing starts were at their lowest level since 2020, the potential for a turnaround is evident. As mortgage rates continue to fall, the housing market is expected to regain momentum and attract more buyers.

Overall, the housing market is poised for a potential boost with the recent drop in mortgage rates. Homebuilders are hopeful that the improved affordability will entice buyers and lead to an increase in housing starts. As the market continues to evolve, it will be interesting to see how the changing mortgage rates shape the future of the housing industry.

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