New U.S. home construction plunged in July for the third consecutive month, evidence that rising interest rates and steep prices for construction materials are starting to cool the red-hot housing market.
Housing starts dropped 9.6% last month to an annual rate of 1.446 million units, the lowest level since February 2021, according to new Commerce Department data released on Tuesday. That's below Refinitiv economists' forecast for a pace of 1.540 million units.
Applications to build – which measures future construction – slowed to an annual rate of 1.67 million units, which is also the lowest since September.
Single-family housing starts, which account for the biggest share of homebuilding, tumbled 10.1% in July to a rate of 916,000 units, the lowest since June 2020. Still, the decline was not broad-based across the country: Single-family homebuilding decreased in the Midwest and the South, but actually increased in the West and Northeast.
"With a big drop in housing starts in July, housing has clearly gone from tailwind to headwind for the U.S. economy," said Bill Adams, chief economist for Comerica Bank. "Housing will likely subtract from real GDP growth for the next year."
The data comes one day after the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market, fell for the eighth consecutive month to 49, marking the worst stretch for the housing market since the 2008 financial crisis.
Any reading above 50 is considered positive; the gauge has not entered negative territory since a brief – but steep – drop in May 2020.
The index has fallen considerably from just one year ago when it stood at 80. It peaked at a 35-year high of 90 in November 2020, buoyed by record-low interest rates at the same time that American homebuyers – flush with cash and eager for more space during the pandemic – started flocking to the suburbs.
"Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession," NAHB chief economist Robert Dietz said.
The interest rate-sensitive housing market has started to cool noticeably in recent months as the Federal Reserve moves to tighten policy at the fastest pace in three decades. Policymakers already approved a 75-basis-point rate increase in both June and July.
The average rate on a 30-year fixed mortgage climbed to 5.22% for the week ending Aug. 11, according to recent data from mortgage lender Freddie Mac. That is significantly higher than just one year ago when rates stood at 2.86%.