U.S. housing supply continues to fall amid rising mortgage rates

REAL ECONOMY BLOG | July 19, 2022

Authored by RSM US LLP

Housing starts and permits in the United States continued to fall in June amid higher interest rates and sharp declines in demand because of elevated housing prices, the Census Bureau reported on Tuesday. There were 1.56 million new housing starts in June on an annualized basis, a 2.0% decline from May and the lowest level since last September. The number remained below our estimate of the 1.7 million new starts that are needed every month to meet long-run demand. May’s reading was revised upwardly to 1.59 million.

Still, the decline in housing supply in June lowered our forecast for gross domestic product in the second quarter by 1.5 basis points  to 0.19% on an annualized quarter-over-quarter rate. After a six-month period of averaging above 1.7 million from November to April, housing starts have slowed significantly since May as a steep rise in mortgage rates has deterred buyers. Traffic of prospective buyers has dropped by a sharp 50% since the start of the year, according to recent data from the National Association of Home Builders. Building permits—a proxy for future starts—also declined in June to 1.685 million from 1.695 million, mostly driven by an 8% drop in single-family homes. The number of completions dropped by 4.6% in June after rising by 6.9% in the prior month. Facing a pullback in demand and high input costs, builders are reconsidering adding more supply of new homes to protect their margins from a potential decline in prices. Anecdotal evidence has been showing a slower price growth or even declines in prices in some markets where inventories are high. This further complicates the current housing shortage that the United States has been facing since the housing market crash in 2008. High prices and low supply will continue to keep millions of Americans from being able to afford a home. We expect the deficit to approach 4 million by the end of the year if housing starts continue to decline. We believe that government agencies at the national and local level need to take a more active role to overcome the current housing deficit, adopting policies including more flexible zoning restrictions, expanded housing tax credits and regulations that broaden affordability.

The takeaway

The decline in the housing supply will continue until the end of the year as the Federal Reserve raises interest rates to combat inflation and as economic activity slows across the market.