In yet another sign of trouble brewing in the U.S. housing market, the construction of new homes fell sharply in the month of September.
U.S. housing starts for the month were down 9.4% to a seasonally adjusted 1.256 million as compared to the 12-year highs seen in August, according to the Commerce Department.
Another sign of trouble for the U.S. housing market
Economists surveyed by Reuters were originally anticipating U.S. housing starts for September to come in at 1.320 million units, but the sharper-than-expected fall suggests that the market is losing momentum. Building permits also fell 2.7% to 1.387 million in September, which is another red flag as this number indicates the construction pipeline.
The sharp decline was the result of a 28.2% drop in multi-family housing starts, while building permits in the segment fell 8.2% as compared to the previous month. However, single-family housing starts held their ground and rose 0.3% to 918,000 units, supported by low mortgage rates. This is the highest level seen since January.
However, single-family housing starts turned lower in certain markets – the Northeast, the Midwest and the West, though an increase in the South put the number in positive territory. The general belief is that the decline is nothing but a short breather for the U.S. housing market.
Higher construction costs and shortages of land and labor are being blamed for the fall in housing starts last month. But a closer look at some other indicators will tell us that this could be more than just a temporary decline.
Don’t miss these warning signs
Last week, Fannie Mae revealed that confidence in the U.S. housing market has begun sliding. The monthly Home Purchase Sentiment Index (HPSI) for September was down 2.3 points to 91.5 after hitting a high in August.
Fannie Mae blamed the sliding confidence on lower job security and uncertain economic conditions. That was not surprising as the U.S. economy added fewer than expected jobs in September, and this seems to have dented housing market confidence.
What’s more, the Federal Reserve seems divided over future interest rate cuts, putting the momentum of the housing market in jeopardy. Chicago Fed President Charles Evans believes that the U.S. economy does not need any more rate cuts in 2019 and 2020.
The Fed has slashed interest rates at its last two meetings, but growing dissent within the central bank indicates that there might be no more rate cuts on the horizon. If that indeed turns out to be the case, the housing market will continue to lose momentum as there is a shortage of affordable homes.
Realtor.com data tells us that housing inventory in the U.S. was down 2.5% year-over-year last month, with supply of entry-level homes witnessing a sharp downturn of 9.8%.
Moreover, consumer confidence in the U.S. dipped in September to a reading of 125.1 as compared to 134.1 in August. The decline was much deeper than the reading of 133.5 economists polled by Reuters had anticipated, driven by trade tensions, a slowdown in global economic growth and deteriorating conditions in the labor market.
In all, a combination of weak job growth, an uncertain economic scenario, a lack of affordable homes and no further rate cuts could eventually knock the wind out of the U.S. housing market, turning the brief breather into a prolonged downturn.