New Construction Surprises to the Upside in October

The pace of new construction quickened in October as both building permits and housing starts rose despite elevated mortgage rates, the government reported on Friday.

The release from the Census Bureau and the Department of Housing and Urban Development showed that permit issuance was 1.1% higher at a 1.487 million annual rate, up from 1.471 million in September. New housing starts were 1.372 million compared to 1.346 million a month earlier. Both permits and starts were above forecasts.

The report comes a day after the National Association of Home Builders and Wells Fargo released their survey of builder confidence for October. The index was down six points to 34 and now is at its lowest since December 2022.

“Homebuilding activity in October was strongest in the Midwest and West, while the delivery of new single-family homes in the Northeast continues to stall due to a combination of factors including weather, supply chain issues, and difficulties getting new housing projects permitted,” said Bright MLS Chief Economist Lisa Sturtevant.

“There may be some bright spots for homebuilders in the months to come,” she added. “A good inflation report and steadily declining mortgage rates provide some relief to the market. At the same time, there are still many individuals and families who want to buy a home but who are waiting for more supply.”

Builders are finding opportunity with homebuyers as the inventory of existing homes remains low relative to demand, and new homes often come with incentives and mortgage buydowns. The data was also collected before this week’s report showing the consumer price index for October fell to an annual rate of 3.2% from 3.7% in September.

Also on a positive note, mortgage rates fell this week following the CPI and the resultant drop in bond yields from their recent highs. The 30-year fixed-rate mortgage fell to an average of 7.44% in the week ending Nov. 16, a drop from 7.5% a week earlier, Freddie Mac said on Thursday.

“Builders have been benefitting from the lack of resale inventory and from their ability to use incentives such as mortgage rate buydowns to entice buyers off the sidelines,” said Odeta Kushi, deputy chief economist at First American. “Builders have a huge competitive advantage over the resale market in this way.”

Added Kelly Mangold of RCLCO Real Estate Consulting: “The increase in starts this month shows that builders are anticipating positive conditions over the next year when these homes become available for buyers.”