Homebuilders have no motivation to grow permits with 7% rates

Even though new home sales showed growth last month, the homebuilders — both big and small — have no desire to grow housing permits or starts with 7% mortgage rates. Housing starts and permits peaked in 2022 and have been fluctuating at levels similar to the early stages of the COVID-19 recession for some time now. The housing construction cycle reached its peak in 2022, unless mortgage rates decrease.

As I noted in June 2021 that rising mortgage rates would ultimately signal the end of the housing construction cycle. Fortunately, large builders have maintained sufficient profit margins to prevent the situation from worsening. However, as active inventory in the resale market continues to grow, it will become increasingly complex to build more homes with mortgage rates near 7%.

From Census: Housing Starts: Privately-owned housing starts in May were at a seasonally adjusted annual rate of 1,256,000. This is 9.8 percent (±9.3 percent) below the revised April estimate of 1,392,000 and is 4.6 percent (±8.3 percent)* below the May 2024 rate of 1,316,000.

Building Permits: Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 1,393,000. This is 2.0 percent below the revised April rate of 1,422,000 and is 1.0 percent below the May 2024 rate of 1,407,000.

The interesting part about all this data this year is that new home sales hit a multi-year high and their purchase application data hit a post-COVID-19 high two months ago, and still, the builders’ confidence data that is tilted toward smaller builders is very close to the COVID-19 lows.

What Is the real problem here?

Before the year started, I wrote about the supply and demand challenges that builders would face in 2025. The main issue is that supply is increasing for builders; both the number of completed units for sale and their backlog of homes that haven’t started yet are at all-time highs. This situation does not create an environment that fosters optimism about obtaining housing permits for growth. Instead, they need to focus on managing the supply they currently have in the market and the future homes they need to construct.

It’s not surprising that the data appears this way. Single-family permits are declining, the number of single-family homes under construction is decreasing and single-family starts have stabilized this month. However, the overall trend is concerning. Bringing mortgage rates down to around 6% could help, but we don’t have the monetary policy in place to achieve that. The only time rates tend to move toward 6% is when economic data shows signs of weakness. However, both times when mortgage rates get toward 6%, the builders, both small and big, do better.

Could things get worse?

The one saving grace for the housing starts data is that it could have been a lot worse today. If the big builders didn’t pay down rates, new home sales data would have come in much lower.

As always, this is such a key sector to my economic cycle recession work, as it’s a key labor trigger for me, as you can see below.

The recent new home sales report was at a multi-year high too, so growth will be more challenging with higher mortgage rates. The latest data from the Mortgage Bankers Association on new home sales purchase applications indicates some weakness beyond the usual seasonal decline that occurs every year.

Overall, the situation could be worse, but fortunately, major builders are taking steps to address it, especially since the Federal Reserve appears to be unconcerned about the stagnation in housing construction over the past few years.