Housing Market Gets Positive Sign

The number of new residential home construction in November posted its strongest jump since May, a signal of an improving housing market that has struggled amid elevated mortgage rates, high prices and low supply of homes for buyers.

Housing starts, which refers to the building of new housing units, skyrocketed by nearly 15 percent in November from the previous month to about 1.6 million, according to data from the U.S. Census Bureau and the Department of Housing released on Tuesday. From a year ago, new home starts rose by more than 9 percent to 1.4 million. Single-family housing starts also saw substantial improvement as they shot up by 18 percent to 1.1 million.

Analysts say that the frozen used homes market has opened an opportunity for builders of new homes. High mortgage rates that in October hit a two-decade high of 8 percent have locked in sellers who are preferring to stay put on their cheaper rates.

"Investors have clearly rewarded homebuilders as low inventory of existing homes on the market has created an opportunity for new construction," Jeffrey Roach, chief economist for LPL Financial, told Newsweek.

Over the last few weeks, mortgage rates have been falling from their upward highs of 7 percent over the last two months. Last week, rates fell below 7 percent for the first time since August, according to Freddie Mac, emboldening buyers and encouraging builders to invest.

"Falling mortgage rates also helped ignite demand. Mortgage rates are the lowest since July," Roach said.

Mortgage rates have been at their highest since the turn of the century following the Federal Reserve's aggressive hiking of its funds rate to battle a historic rise of inflation. Inflation has shown evidence of cooling over last few months, prompting policymakers to pause their interest rate hikes for the third time in a row last week.

Experts believe that as inflation continues to improve, the possibility of more rate hikes from the Fed becomes less likely, paving the path for cuts next year.

"It is all about the pace of cuts from here," analysts from the Mortgage Bankers Association said this week. "This is good news for the housing and mortgage markets. We expect that this path for monetary policy should support further declines in mortgage rates, just in time for the spring housing market."

Building permits showed a monthly decline in November, the data released on Tuesday showed.

"Both single- and multi-family starts posted solid gains in November and starts rose in all regions," Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said in a note shared with Newsweek.

The outlook going forward on multi-family new homes construction was more vulnerable to a decline as their supply was "more plentiful and lending standards have tightened more," Vanden Houten said.

"Recovering homebuilder sentiment and an ongoing need for inventory should cushion the downside for single-family starts," she added.

The National Association of Realtors (NAR) gave a more optimistic take on Tuesday's residential construction data, alluding to the 18 percent jump in new single-family homes building that they noted was up 42 percent from a year ago.

"As homebuilders ramp up production, more supply will reach the market," Lawrence Yun, NAR's chief economist, said in a statement shared with Newsweek.

Builders offering incentives to buyers, such as buying down rates and paying commissions to buyer agents, has helped to prop up sales despite an environment of elevated rates, Yun said.

"That's the free market way of doing business in a very competitive industry," he said.

Shortage of supply of new homes is still an issue for the housing market, Yun added, suggesting that the more properties available for sale the better chance that there will be a decline in prices, as well.

"Home price appreciation can only moderate from drastically improved supply," Yun said. "Another 30 [percent] rise in home construction can easily be absorbed in the marketplace, especially in light of recent weeks' plunge in mortgage rates."