U.S. new home starts rose significantly in August, with single-family new homes becoming the driving force, but continued increases in manufactured housing inventories may dampen real estate agent activity in the near term, and the outlook for the housing market faces challenges.

New Home Starts Rebound Strongly, Single-Family New Homes Increase Significantly

According to the latest data from the U.S. Department of Commerce's Census Bureau, U.S. new home starts increased at an annualized rate of 9.6% to 1,356,000 in August 2024 compared to July, successfully shaking off the four-year low set in July. In particular, the annualized rate of single-family new home starts, which make up 70% of the residential market, jumped 15.8% to 992,000 units. This suggests that demand for new homes is picking up as mortgage rates slide.

However, despite the rebound in new home starts, the increase in building permits, which reflect future homebuilding trends, was relatively modest, rising 4.9% from a year ago to 1.475 million, down 6.5% from a year ago. Building permits for new single-family homes increased at an annualized rate of only 2.8% from a year earlier, suggesting that real estate developers remain cautious in their expectations of market demand.

Pending Home Sales Weak, Rising Inventories Improve Supply

The National Association of Realtors (NAR) released a report showing that the total number of U.S. home sales fell to 3.86 million in August, below the market's expectations of 3.9 million, and lower than the 3.95 million in July, the lowest sales figures since last October. the total number of annualized home sales in August fell by 2.5%, which is far below the market's expectation of 1.3%.

Despite the weak performance in home sales, the inventory of manufactured homes rose for the eighth consecutive month, with the supply increasing 0.7% to 1.35 million homes, the highest level since 2020. This data suggests that supply in the market has eased as interest rates have fallen and homeowners have been reluctant to sell. However, the current inventory-to-sales ratio of 4.2 months is still below the normal 5-month level, indicating that supply is still on the tight side of the market.

Mortgage rates slipped, supporting home purchase demand

With the Federal Reserve's announcement of a significant 50 basis point interest rate cut on September 18, lowering the federal funds rate to a range of 4.75-5.00%, mortgage rates also fell in tandem. As of September 13, the U.S. 30-year mortgage fixed rate fell to 6.15%, while the 15-year fixed rate fell to 5.42%.

Lower mortgage rates are expected to boost the housing market, especially for first-time buyers, the lower financing costs will reduce their pressure to buy a home. Data from the Mortgage Bankers Association (MBA) shows that with the decline in mortgage rates, the number of new home purchases and refinancing applications increased sharply in early September, indicating that demand in the housing market is gradually picking up.

Realtors face challenges as competition for manufactured home inventory may intensify

Experts say that despite the rebound in new housing starts, real estate developers may face competitive pressures from rising manufactured housing inventory.

With mortgage rates remaining high, many homeowners who had locked in low interest rates were reluctant to sell, leading to a chronic shortage of supply in the manufactured housing market, giving real estate developers more room in the market. However, as mortgage rates come down, the reluctance of homeowners to sell is likely to improve, and an increase in the supply of manufactured homes will intensify the competitive pressure on real estate developers.

Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said that despite the pickup in new-home sales in 2023, real estate developers seem to be overreacting, and that single-family new-home construction is likely to cool off in the coming months as inventories show signs of being overstocked. However, falling mortgage rates will boost demand for new homes to some extent and act as a supportive force for realtors.

Future Outlook and Challenges

In the coming months, mortgage rates are expected to fall further as the Federal Reserve continues to push for easing, which is expected to support a rebound in demand in the housing market. However, the core issue in the market remains a supply shortage, a problem that is not fully solved by the Fed's policies.

According to NAR data, the percentage of first-time homebuyers was only 26 percent in August, approaching an all-time low, indicating that housing market affordability challenges remain.NAR Chief Economist Lawrence Yun said that despite the disappointment of home sales in August, sales figures are expected to rebound in the coming months as mortgage rates fall and inventories increase.