as Higher Mortgage Rates Take Their Toll

• Housing starts were down less than 1% in November, with a 4% decline in single-family starts.
• Residential building permits fell 11% in November, with single-family permits down 7%.
• Both housing starts and permits are down dramatically from earlier this year, with especially large declines in single-family activity.
• Higher mortgage rates are causing a contraction in homebuilding.
• The US economy will fall into recession in 2023 as the Federal Reserve continues to raise interest rates to control inflation.
  

Housing starts fell 0.5% in November from October, to 1.427 million at a seasonally-adjusted annual rate (SAAR). Single-family starts were down more than 4% to 828,000, while multifamily (apartment and condominium) starts were up 5% to 599,000.

After peaking at 1.805 million in April, starts have fallen 20%, with single-family starts down 32% from early 2022.

Housing permits fell 11% in November from October, to 1.342 million (SAAR). Single-family starts fell 7% over the month, to 781,000. Multifamily starts were down 16% in November to 561,000. The big drop in permits in November indicates that starts will drop further in the near term.

Permits have fallen 29% since peaking in February 2022, with single-family permits down 35% over this period.

Higher mortgage rates are a huge drag on the housing market in late 2022. The typical rate on a 30-year fixed rate mortgage is now around 6.7%, up from below 3% as recently as September 2021, as the Federal Reserve has tightened monetary policy, including reducing its holdings of long-term assets. This has made it much more expensive to borrow to buy a home. Big runups in home prices since the pandemic have also eroded affordability, with tighter credit also a drag on the housing market. As a result homebuilding is quickly contracting, and will continue to decline in 2023.

This is what the Federal Reserve is attempting to do. Higher borrowing costs are leading to contractions in interest-rate sensitive industries such as housing. The central bank’s hope is that this will slow overall economic growth and inflation, but not lead to a contraction in the overall economy. But given the Fed’s aggressive monetary tightening this year, with further fed funds rate hikes expected in 2023, PNC now expects a mild recession in 2023, with housing playing a major role in the contraction.

Housing will play a major role in the coming slowdown in the job market. Employment in residential construction, after rebounding quickly from the pandemic, has essentially been flat over the past half-year as housing activity has declined. Employment in homebuilding is expected to decline in 2023.