US Housing Starts Hit 18-Month Lows as Surging Interest Rates Strangle Market

WASHINGTON (Sputnik) - Construction of new US homes hit 18-month lows in July, according to Commerce Department data on Tuesday that suggested that interest rate hikes by the Federal Reserve were boosting mortgage rates that in turn were strangling the property market.

New residential construction, or housing starts as they are popularly known as, fell by 9.6% last month to 1.45 million, hitting February 2021 lows.

Economists polled by US media had expected July housing starts to drop to a 1.52 million rate from June’s initial estimate of 1.56 million.

For the year to July, the slump was 8.1% compared with the previous year.

Economists were in consensus that the property market was tanking directly as a result of surging interest rates, although some said it was still resilient given the circumstances.

The Fed has raised interest rates four times since March, bringing them to a peak of 2.5% from a high of just 0.25% in February. The central bank says it expects to continue with rate hikes until inflation returns to its target of 2% per year. Inflation, as measured by the Consumer Price Index, grew by 8.7% during the year to July.

US home prices have jumped almost 40% over the past two years. Mortgage rates,  meanwhile, surged from 3.2% to about 6% in the past six months. The combination pushed up the cost of home ownership in the United States to the highest in a generation, putting purchases out of reach for a growing number of prospective buyers, particularly first-time purchasers.

Another sign the housing market is cooling. Housing starts fall 9.6% MoM. pic.twitter.com/lM0UOOzn46

— Kathy Jones (@KathyJones) August 16, 2022

Housing and real estate play important roles in the US economy, with roughly 65% of occupied housing units being owner-occupied. That makes homes a substantial source of household wealth and home construction a key provider of employment.

In the 2008/09 financial crisis, a crash of the housing market precipitated what later came to be known as the era of the Great Recession. Since then, the US property market has rapidly recovered on the back of economic recovery as well as demand from buyers.

Now, some economists say demand for homes might be unraveling from the triple whammy of Federal Reserve rate hikes, inflation in house prices and soaring mortgage rates.