Are Rising Rates Slowing Home Construction? Not Yet, Analysts Say.

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Home construction is forecast to rise slightly for June but it might not last.

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Stefani Reynolds/AFP via Getty Images

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New home construction data for June are expected to show little improvement from May’s steep drop as cancellations and decreasing affordability weigh on builders.

Home builders reported recently that they are discounting more to attract and retain buyers as interest rates soar on mortgages.

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Two government gauges of new-home construction, housing starts and building permits, fell to their lowest level since 2021 in May. Levels are expected to be little changed when the June data is released Tuesday. The seasonally adjusted annual rate of housing starts, a measure of new homes under construction, is expected to rise to about 1.56 million in June, from a preliminary rate of about 1.55 in May, according to FactSet. The rate of permits, which gauges authorizations for new-home construction, is anticipated to fall to 1.68 million, down from about 1.7 million in May.

The data comes as higher mortgage rates and home prices weigh on buyers’ ability to afford a house. The National Association of Realtors’ housing affordability index in May fell to its lowest level since mid-2006—and that was before mortgage rates climbed above 5.5% for the first time in more than a decade in June, according to Freddie Mac data.

Higher rates made financing a home purchase more expensive—but that isn’t the only affordability pressure worrying home builders. “Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the appraised value of the home,” wrote National Association of Home Builders chief economist Robert Dietz in a blog post .

The trade group’s latest measure of builder sentiment, released on Monday, slid to its lowest level since June 2020. In what Dietz described as a signal that the housing market is softening, 13% of builders surveyed said they reduced home prices to strengthen sales or limit cancellations.

Cancellations became a hot topic after Redfin reported last week that home sales in June were canceled at the highest rate since the spring of 2020. The increase in cancellations is likely due in part to buyers having more negotiating power amid a larger slowdown, Redfin deputy chief Economist Taylor Marr said last week. “Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies,” Marr said. “That gives them the flexibility to call the deal off if issues arise during the homebuying process.”

Rising rates have also contributed to cancellations, Marr said. “If rates were at 5% when you made an offer, but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for a loan,” he said .

Other data due from the National Association of Realtors later this week is likely to paint a fuller picture of the housing market’s recent shift into lower gear—though it will still take time to see the full impact from June’s higher rates. Consensus estimates compiled by FactSet foresee the seasonally adjusted annual rate of existing-home sales falling to 5.37 million, down from 5.41 million a month earlier, when the data is released on Wednesday.

Write to Shaina Mishkin at [email protected]


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