The Fed’s monetary policy inhibits new construction

Since mortgage rates have risen again, I expected today’s housing market start report to be the last decent print before the fallout from higher mortgage rates hits builders, but even this report was disappointing.

We had a good few months with positive builder confidence figures for the new build sector and positive purchase inquiry data for existing home sales. However, mortgage rates shot up again after the crisis Federal Reserve interest rate cut on September 18. Simply put, the Fed’s policies are still too restrictive for housing growth, and a rate hike in recent weeks won’t help. This has been so confusing for the American consumer CNBC asked me to talk about this topic Today.

Now that housebuilders have completed more homes in their backlog and permits for five homes are effectively at recession levels, we are at the stage where policy is starting to impact the future supply of shelter. Let’s take a look at the report.

By Census: Building permits: “The number of private homes granted planning permission in September was a seasonally adjusted annual figure of 1,428,000. This is 2.9 percent below the revised figure of 1,470,000 in August and 5.7 percent below the figure of 1,515,000 in September 2023.”

We are at recession levels for 5-unit housing permits. Anyone who thinks we are on the cusp of a housing boom is kidding themselves, with policies still so restrictive. Over time, falling Fed Funds rates may lead to better demand for apartment construction, but that’s not today, my friends. I just hope that we are closer to the housing permit floor for the construction of five homes, so that eventually, as the Fed’s policies become less restrictive, we can build more apartments.

“The number of authorizations for single-family homes was 970,000 in September; this is 0.3 percent above the revised August figure of 967,000. The number of authorizations for units in buildings with five or more units was 398,000 in September.”

This was the most disappointing aspect of the report; I had expected better growth in single-family homes, because the recent increase in mortgage rates should not have been fully felt here yet. However, we know that mortgage rates above 6.75% have made builders less enthusiastic about issuing many single-family permits. We must also remember that smaller homebuilders do not have the luxury of more prominent homebuilders lowering mortgage rates to sell more homes. Again, it is not positive for America that interest rates have just risen again.

Home completions: “The number of privately owned homes completed in September was a seasonally adjusted number of 1,680,000. This is 5.7 percent (±19.9 percent)* below the revised August estimate of 1,781,000, but 14.6 percent (±11.9 percent) above the September 2023 figure of 1,466,000.“

This is the only positive story in the report: the backlog and long lead times for building and completing homes have finally turned into a noticeably better data line. The only problem with this is that once these units are ready, the lack of housing permit growth, especially in the 5-unit development area, means we may not ramp up production quickly enough to avoid a gap from shortage to production.

This also means that if construction workers cannot find it AI data centers to work onwe will most likely lose some construction workers. When mortgage rates were above 6.75% earlier this year, we saw no growth in the number of residential construction workers, and permits for single-family homes fell throughout the year. Historically, the US recession is not far away when home care workers lose their jobs.

Overall, this was a disappointing report, and this should throw cold water on anyone who believes we are on the brink of a construction boom because, as I have often noted, the builders are not the March of Dimes. They will build as soon as they see that the demand for their product is profitable.

When mortgage rates headed toward 6%, builders felt better about their future growth prospects, but that changed in recent weeks. As I noted today on CNBC, we can grow existing home sales and increase housing production, but we need mortgage rates to remain around 6% for some time. Hopefully this will happen sooner rather than later.