Home builders are pumping the brakes on construction. It's a positive sign for investors waiting for builders' margins to firm up, and less favorable for buyers looking for deals and perks in an expensive housing market.
Single-family housing starts-a measure of the beginning of construction on a new home-slid to a seasonally adjusted annual rate of 808,000 in July, according to census data. It's the lowest such level since 2022, historic data show.
A lot has changed since November 2022. Back then, the housing market had just entered what industry economists described as a housing recession after 30-year fixed mortgage rates climbed nearly two percentage points in a matter of months.
The housing recession now is old news. Home sales remain weak, the 30-year fixed rate mortgage is stuck well above 6%, and the amount of time it would take to sell through every new home on the market as of June sits at an elevated level above nine months.
Home builder stocks were largely lower on Tuesday-but the decline likely had more to do with the rate-sensitive sector's concerns about long-term bond yields than housing data. The large home builders D.R. Horton, PulteGroup, and Lennar were down 1%, 0.7%, and 1.2%, respectively, while the S&P 500 was 0.6% lower. The broader iShares U.S. Home Construction exchange-traded fund is about flat this year versus a gain in the S&P 500 north of 12%.
"Builders remain cautious as elevated mortgage rates, rising construction costs and economic uncertainty continue to limit demand," Danushka Nanayakkara-Skillington, the National Association of Home Builders' vice president for forecasting and analytics, said in a statement.
Those factors have worn down builder margins. More than a third of those surveyed by the National Association of Home Builders said they cut prices in August, while more than three in five offered sales incentives.
For buyers in search of options in a tight local housing market-or taking advantage of elevated discounts and sales incentives in a neighborhood with more than enough homes for sale-the decline in starts today could result in a crunch tomorrow.
"If builders pull back significantly, which they have started to do, we won't have as many homes on the market in the years ahead," says Orphe Divounguy, founder and chief economist of Quantitative Research Group and former senior economist at Zillow. "The pendulum will start to swing again in favor of the seller."
On the other side of the coin is a bright spot for investors waiting for signs of temperance in building. Investors have long watched builder margins for signs of stabilization in demand.
"Overall, the results are in line with our view, particularly for single-family, that builders are slowing production to better align supply with soft demand," Evercore analyst Stephen Kim wrote in a reaction to the report. In a note earlier this year, Kim wrote that builders in the long-term should "adopt a slower pace of housing starts to appropriately match the tepid demand environment" as household growth slows this decade.
The slowdown in starts is in-line with trends that Rick Palacios, Jr., director of research at John Burns Research and Consulting, has been tracking.
"Home builders need to slow housing starts even further given new home sales have slowed more than is seasonally usual this summer as mortgage rates jumped again, and the industry still has too much unsold inventory to warrant reaccelerating housing starts anytime soon," he says.
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