Home Building Takes Sharp Turn as Market Struggles

New construction of privately owned homes jumped in October, according to figures released on Friday, at a time when mortgage rates are elevated and the cost of borrowing is high.

Housing starts, which refers to the building of new homes, rose 1.9 percent to nearly 1.4 million from September to October, according to data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. Single‐family housing starts also increased slightly in October by 0.2 percent to 970,000. But in a sign that the sector is still trying to overcome economic headwinds that have stifled activity, housing starts were 4.2 percent below the October 2022 rate.

Building permits also rose in October by more than 1 percent but still were 4.4 percent lower than the same time last year.

The housing market has struggled under the weight of high interest rates that have pushed up mortgage rates to two-decade highs that have priced out prospective buyers. The Federal Reserve began hiking rates last year to tackle soaring inflation. Inflation has slowed, but elevated rates have made the cost of financing everything from homes to home building expensive, slowing the market.

But the new numbers of new housing starts and building permits bode well for the market, analysts said.

"Housing starts inched up in October, and building permits, the more forward-looking gauge of activity, posted a healthy increase, suggesting a resilient housing sector, despite higher interest rates and tighter credit conditions," Nancy Vanden Houten, a lead U.S. economist at Oxford Economics, told Newsweek.

Recent economic data showing that the labor market was softening and that inflation was cooling could signal to Fed policymakers that their battle against soaring prices was making progress and to pause on hiking rates for the foreseeable future.

The developments could also help soften mortgage rates.

Robert Dietz, the chief economist at the National Association of Home Builders, told Newsweek on Thursday that the housing market could see an improvement next year.

"There's some challenges in place, but our forecast is for about a 5 percent growth rate for single-family starts in 2024," Dietz said. "As mortgage rates decline in 2024—and we do think that will happen in our forecast—that demand is going to get priced back into the market."

Mortgage lender Freddie Mac said on Thursday that the 30-year fixed-rate mortgage had averaged 7.44 percent over the last week, the third week in a row that it had declined after reaching a two-decade high of 8 percent.

Oxford Economics experts believe that while they forecast housing starts to weaken going into early 2024, the sector might recover by the middle of next year.

"However, the permits data and the latest decline in mortgage rates lend upside risk to that outlook," Vanden Houten said. "Higher mortgage rates and negative homebuilder sentiment will weigh on single-family starts, although the need for inventory may provide some cushion for the downside.

"We think the multifamily sector, where supply is more plentiful and lending standards have tightened more, is more vulnerable to a downturn."