Construction ticks up, but builders are still glum 

New home construction staged a slight rebound in July, but it will still be a tough go for the industry in the second half of the year.

Housing starts were up 5.2% compared to June, reaching a seasonally adjusted annual rate of 1.43 million units, according to the U.S. Census Bureau. Much of the increase was driven by multifamily construction, however, as single-family starts rose by just 2.8%.

Building permits issued for single-family homes in July were up 0.5% month-over-month, while single-family completions were up 11.6% for the same period.

Challenges ahead: Although the monthly increases in single-family starts, permits and completions are good news for the industry — and represent a turnaround from June, when all three metrics were down — other factors are keeping construction subdued, according to Robert Dietz, chief economist at the National Association of Home Builders. 

"Builders continue to contend with challenging housing affordability conditions and a host of supply-side headwinds, including labor shortages, elevated construction costs and inefficient regulatory costs," Dietz said in a blog post.

Builders remain bearish: NAHB's Housing Market Index, which tracks builder perceptions of the single-family housing market, came in at 32 this month. That's down one point from July and tied with June for the lowest level so far this year, reflecting the difficulties the industry is facing.

Builder sentiment during the month of August hasn't fallen below 37 since 2011, when the construction industry was still recovering from the Great Recession. 

Sales incentives up: The survey found that 37% of builders have been cutting prices in August, which is similar to the share in June and July, but more builders are offering sales incentives to close deals. Incentives were used by 66% of the respondents in August, up from 62% in July and the highest percentage since the end of the pandemic, according to NAHB.

The chronic housing deficit: With builders expressing pessimism about the market, addressing the shortage of homes continues to be challenging, especially during a period of economic uncertainty, according to Odeta Kushi, chief economist at First American.

"The housing market remains structurally undersupplied, and we need more hammers at work to build the homes that are still in short supply," Kushi said.

There are currently 621,000 single-family homes under construction, down 3.7% compared to a year ago, according to NAHB.

What's happening regionally: Construction levels appear to align with supply and demand trends across the country. Combined single-family and multifamily starts for July were up 17.7% in the Midwest and up 10.2% in the Northeast, two areas where demand is generally stronger. 

Construction starts have slowed in areas where overall inventory is growing the fastest, including the South (down 2.4% year-over-year) and the West (down 0.5%).