In September, U.S. single-family homebuilding reached its highest level in five months, offering a sign of resilience in the housing sector. However, the overall trend remains soft as building permits for future projects saw only a slight uptick. The market continues to grapple with an oversupply of new homes, while many prospective buyers are holding off on purchases, hoping for lower mortgage rates.
Despite the second consecutive monthly increase in single-family housing starts, the broader impact on the economy remains muted. Economists suggest that residential investment, which includes both homebuilding and home sales, is still a drag on economic growth in the third quarter. Earlier this year, a surge in mortgage rates dampened homebuilding, and although rates briefly fell after the Federal Reserve cut interest rates last month, they have been creeping back up due to strong economic data. This increase has led traders to temper expectations for further rate cuts.
According to Carl Weinberg, chief economist at High Frequency Economics, “Residential construction activity is not helping the economy grow at its potential rate.” He noted that while rates are falling, they aren’t yet low enough to spur immediate construction or purchases, as both builders and buyers may delay action in anticipation of further rate reductions.
In September, single-family housing starts rose by 2.7% to a seasonally adjusted annual rate of 1.027 million units, following a higher-than-expected revision for August. Growth was notable in the Northeast and South, but declines in the Midwest and West—areas typically known for affordability and demand—illustrate the uneven recovery across regions. Over the third quarter, single-family starts declined at a 15.5% annualized rate, after a sharper drop in the previous quarter.
Residential investment weighed down the economy in the second quarter, and while third-quarter economic growth is estimated to be as high as 3.4%, the construction sector continues to lag. Economist Abiel Reinhart from J.P. Morgan sees signs that the housing market may be bottoming out, offering the possibility of residential investment turning positive in the fourth quarter, after its drag in the third.
Low Building Permits Suggest Future Slowdown
One reason for the slower rebound in homebuilding is the excess inventory of new homes, compounded by rising mortgage rates that have sidelined potential buyers. A survey by the National Association of Home Builders in October showed a modest improvement in builder sentiment, with more builders offering incentives like price cuts to attract buyers.
While single-family housing starts showed improvement, overall housing starts, including multi-family units, declined by 0.5%. Economists had predicted a slight drop to 1.35 million units, but the actual rate came in at 1.354 million. This represents a 0.7% decrease from the same time last year.
Looking ahead, building permits—an indicator of future construction—saw only a modest 0.3% increase for single-family homes in September. In contrast, permits for multi-family homes dropped sharply by 10.8%, contributing to an overall decline of 2.9% in building permits for the month. This suggests that while some recovery is underway, it may be tempered by ongoing economic uncertainty.
Weather disruptions, including Hurricanes Helene and Milton, which hit parts of the Southeast in late September, could also dampen construction activity in the short term. However, the rebuilding efforts in affected areas are expected to provide a temporary boost to the sector.
Challenges Ahead for Homebuilding Market
The future of the housing market remains closely tied to mortgage rates and the broader economic environment. Although long-term interest rates are expected to decline in the near future, the market’s response may be limited. Many homeowners with existing mortgages locked in at lower rates are unlikely to sell or refinance, which may slow the pace of new construction.
Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, pointed out that while falling interest rates could ease some pressure, an oversupply of new homes relative to sales is likely to prevent a sharp increase in homebuilding activity. The industry’s ability to balance inventory with demand will be crucial in determining its path forward.
In summary, while single-family homebuilding has made gains, the broader housing market faces significant headwinds, including fluctuating interest rates, high inventory levels, and regional disparities in construction activity. The coming months will reveal whether these challenges will continue to limit growth or if the market will stabilize as mortgage rates decline.
