A home under construction in a housing development.

Home construction slowed in August as builder confidence fell 

The multifamily sector saw the largest monthly declines, but single-family starts were also sluggish as mortgage rates remained high.

September 19, 2023
2 minutes

Key points:

  • Housing starts fell to the lowest level since June 2020, with the slowdown happening across single-family and multifamily construction.
  • Permits rose, however, a sign that builders want to be ready if conditions change.
  • Builder confidence dipped for a second month due to the expectation that 7% mortgage rates will keep buyers on the sidelines.

Elevated mortgage rates aren't just pushing homebuyers out of the market — they're also having an impact on new home construction.

Construction of new single-family homes slowed 4.3% between July and August, according to the latest data on housing starts from the U.S. Census Bureau. When you include multifamily units like apartments and condominiums, the slowdown jumps to 11.3%, reflecting a seasonally adjusted rate of 1.28 million starts. That's down significantly from the May peak of 1.58 million starts.

Overall, home construction in August was at its lowest level since June 2020.

The slowdown in apartment construction is a reaction to the perceived oversupply in some markets, said Lisa Sturtevant, chief economist at Bright MLS. For the single-family sector, a boom in construction in the South has prevented the numbers from declining more on a national level, as some regions have seen construction plummet. In the Midwest, for example, single-family starts are down 15.1% year-over-year.

"So far, the new housing sector has benefited from incredibly low inventory on the existing homes side," Sturtevant said. "But expect buyer traffic to slow further this fall, and look for more home builders to drop prices and offer concessions to bring buyers in."  

Even though fewer homes have begun the construction process, building permits for single and multifamily housing rose 6.9% between July and August, suggesting that builders want to be ready for a quick pivot if interest rates go down or demand increases.

But for now, builders appear to be wary. Confidence has declined for a second straight month after rising for the first half of the year, according to the National Association of Homebuilders. Builder confidence, as measured by the NAHB/Wells Fargo Housing Market Index, fell five points between July and August to 45, a sign that builders expect high mortgage rates to deter buyers. It's the first time the index has dropped below 50 in five months.

The drop in builder confidence is a bad sign for the Federal Reserve as it continues to work on getting inflation down to 2%.

"Putting into place policies that will allow builders to increase the housing supply is the best remedy to ease the nation's housing affordability crisis and curb shelter inflation," said Robert Dietz, chief economist at the NAHB, noting that shelter inflation posted a 7.3% year-over-year gain in August, compared to an overall 3.7% consumer inflation reading.

Get the latest real estate news delivered to your inbox.