New Homes Market Feeling Pressure of High Mortgage Rates, Home Insurance Premiums

Data released Wednesday provided a mixed picture of the state of the residential housing market in September, with starts rising 7% but permits for future construction slipping 4.4%, according to the Census Bureau and the Department of Housing and Urban Development.

The report reflects the uneasy state of new construction, with builders facing the strain of high mortgage rates and increased costs for building materials.

Starts were at an annual rate of 1.358 million, up from a revised level of 1.269 million in August, while permits came in at 1.473 million compared to a revised rate of 1.541 million a month earlier.

“To keep buyers interested, many builders have been offering upgrades or buying down mortgage rates, but rising home prices coupled with mortgage rates approaching 8% means there will be fewer buyers in the market to entice,” Bright MLS Chief Economist Lisa Sturtevant said.

It is the week’s second report on the state of the new housing market. On Tuesday, the National Association of Home Builders/Wells Fargo Housing Market Index revealed that builder confidence fell for the third consecutive month in October.

“Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Alabama. “Higher rates are also increasing the cost and availability of builder development and construction loans, which harms supply and contributes to lower housing affordability.”

Another factor that may be playing into the eagerness of people willing to buy new homes is the rising cost of home insurance, especially in states such as Florida and California.

“Today’s September housing starts report reflects the fragility of the real estate market,” said Travis Hodges, managing director at insurance broker VIU by HUB. “With premiums predicted to hike by an average of 9% this year, finding affordable coverage remains a pivotal consideration for new buyers seeking mortgages. Some prospective homeowners don’t factor in the insurance costs until the end, potentially causing their monthly payment to rise to a level that’s no longer affordable for them.”

On Thursday, the National Association of Realtors will report the level of existing home sales for September, with analysts looking for a 4% drop from August to an annual level below 4 million. In addition to the rising cost of a mortgage, existing home sales are being hit by a lack of available houses for sale as existing owners sit on properties that have mortgages at or below 3%, many of them taken out during the COVID-19 pandemic.

If there is a bright spot to the housing market, it is that low inventory of homes will likely keep prices high for the foreseeable future.