Homebuilders are starting work on fewer single-family houses, a trend indicating that concerns linger about unsold inventory and elevated mortgage rates, even as optimism that borrowing costs for buyers are headed down.
Single-family starts reached a seasonally adjusted 890,000 houses in August, a 7% drop from July and the fewest since July 2024, according to data released Wednesday by the U.S. Census Bureau and the Department of Housing and Urban Development.
Overall housing starts, including multifamily, totaled 1.307 million. That's 8.5% below the revised July figure and 6% off the August 2024 rate.
Mortgage rates have inched down in recent weeks and will likely again after the Federal Reserve on Wednesday voted to drop its key interest rate and signaled future cuts. Still, borrowing costs remain well above the historically low levels from the pandemic era, discouraging some would-be buyers from entering the market.
Building permits dropped 3.7% below the revised July rate and 11.1% below the August 2024 rate, an indication that starts could remain sluggish in the coming months, analysts say. Overall and single-family housing completions both increased from July.
Builders are prioritizing homes already under construction, boosting completion numbers, but at the expense of future projects, according to Odeta Kushi, deputy chief economist at financial services firm First American.
Outlook improves for next year
"Still, builders motivated to clear their inventory, coupled with year-low rates, opens a short-term window of opportunity for buyers," Kushi told Homes.com in an email.
There's little upside to single-family starts in 2025 with the supply of unsold homes and persistent affordability challenges for buyers, according to Nancy Vanden Houten, lead economist at research firm Oxford Economics.
Vanden Houten is more bullish on next year.
"We expect housing construction to improve in 2026 as the economy gets on firmer footing as the Fed lowers interest rates and the benefits of the Republican budget bill kick in," she said in a statement.
Homebuilder sentiment in September posted a 17th consecutive negative reading of 32, according to the National Association of Home Builders/Wells Fargo Housing Market Index released Tuesday. Anything above 50 is considered good.
Still, the Fed's decision Wednesday to cut its benchmark lending rate by 25 basis points will lead to lower interest rates for building and land development loans, and that "will help builders to boost housing production,” said NAHB Chief Economist Robert Dietz in a statement.