• Housing starts fell in September, although permits were up slightly. But both single-family permits and starts declined.
• Higher mortgage rates are weighing the housing market, with single-family starts and permits both down by more than one-quarter compared to earlier this year.
• High mortgage rates will continue to weigh on housing activity into 2023, contributing to an overall slowing in economic growth. This is part of the Federal Reserve’s efforts to cool off the economy and slow inflation.

Homebuilding continues to slow as higher mortgage rates and reduced affordability weigh on construction. Housing starts fell 8% in September from August, including a decline of 5% for single-family starts; more volatile multifamily starts fell 13% over the month.

Permits for residential construction rose 1% over the month, but single-family permits fell 3%. Multifamily permits were up 8% in September.

Homebuilding activity continues to contract as higher mortgage rates weigh on the industry. The interest rate on a typical 30-year mortgage, which was below 3% as recently as a year ago, is now almost 7%. This has made purchasing a new home much more expensive. As a result, both single-family starts and permits are down by more than one-quarter in recent months.

These higher mortgage rates are part of the Federal Reserve’s efforts to cool off economic growth and thus slow inflation. By raising rates and making it more expensive to borrow, the Fed is weighing on economic activity, especially in interest-rate-sensitive industries like housing.

The Fed has been raising the fed funds rate, its key short-term rate, throughout 2022. But more importantly for the housing market, the central bank has been reducing the size of its balance sheet by allowing long-term Treasurys and mortgage-backed securities to mature and not replacing them, putting upward pressure on long-term interest rates, including mortgage rates. Higher inflation has also pushed up long-term interest rates this year.

PNC expects further declines in homebuilding through the rest of this year and into 2023. Mortgage rates should peak soon and then fall in 2023 on expectations for eventual Fed rates cuts, slower inflation, and weaker growth. Housing activity will stabilize at a lower level by late-2023. Construction employment has continued to increase in recent months, in part due to a backlog of projections, but will fall in 2023 with weaker homebuilding, contributing to a bit more slack in the labor market.