Disappointing housing permits show why we need 6% mortgage rates

Homebuilders in America are cheering, not because of the disappointing housing permit data released today, but because mortgage rates are near 6%. We have seen four consecutive months of job losses in residential construction labor, as mortgage rates have been elevated and builders’ inventory has been piling up.

Housing permits, which have been declining since early 2022, took another downturn today with the latest housing starts data. As I write this, we are approaching lower levels of permits than we saw during the COVID-19 recession. The question now is whether near-6% mortgage rates will stimulate homebuilding as they have in the past. The Federal Reserve is widely expected to cut the Fed funds rate today and we will be keeping an eye on how mortgage rates respond.

Housing permits

Building permits: Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,312,000. This is 3.7 percent below the revised July rate of 1,362,000 and is 11.1 percent below the August 2024 rate of 1,476,000. Single-family authorizations in August were at a rate of 856,000; this is 2.2 percent below the revised July figure of 875,000. Authorizations of units in buildings with five units or more were at a rate of 403,000 in August.

As you can see in the chart below, housing permits have been falling for many years now. In an economic expansion you would traditionally see housing permits rising and that hasn’t been the case for some time now. When the builders don’t issue permits, that means they’re less confident about selling the current housing stock in a timely and profitable manner.

Another issue now for the builders, unlike any other period in the last 14 years, is that their completed units are at concerningly high levels. In previous decades, they wouldn’t issue more housing permits unless they believed new home sales could grow.

In late 2022 when mortgage rates started to head down toward 6%, the builders’ confidence and permits picked up, but rates have kept rising to over 7%, which ruined any momentum for housing to grow. However, mortgage rates are now near 6% once again and perhaps we’ll see the Fed say they would like rates to stay this low now to help housing construction grow again. 

Yesterday, the builders’ confidence data looking out six months did perk up a bit. We must remember that smaller homebuilders can’t afford to pay down mortgages for lower rates, unlike the big, publicly traded homebuilders. Therefore these lower mortgage rates really help them.

Conclusion

Imagine if mortgage rates were still above 7% today — we would be looking at less homebuilding and more construction labor would be at risk. However, this is now the third time that mortgage rates have headed down to 6% since late 2022. This time, let’s hope they can stick around long enough to get housing construction going again.