Implications:   New home construction closed out a disappointing Summer by dropping 8.5% in August to the lowest level since May in what continues to be a difficult environment for developers.  Looking at the big picture, homebuilders face a number of headwinds: the largest completed single-family home inventory since 2009, high home prices, restrictive government regulations, stricter immigration enforcement making it difficult to find or replace workers, and the uncertainty of tariffs and how they’ll affect building costs.  All of this has translated into building rates reminiscent of 2019—no growth in over five years.  Digging into the details of the report, the drop in August was broad-based with single-family starts falling 7.0% to the lowest level in more than a year, and multi-family starts (which have helped lift overall construction in recent months) retreating 11.7% to a three-month low.  Meanwhile, permits for new builds continue to lag, falling 3.7% in August to a 1.312 million annual rate, the slowest pace excluding the COVID shutdown months since 2019. One way homebuilders have been combatting sluggish activity is by focusing their efforts on completing projects.  That was the case in August, as new home completions jumped 8.4% to a 1.608 million annual rate and which have now outpaced starts and permits in eleven out of the last twelve months.  With strong completion activity and tepid growth in starts, the total number of homes under construction has fallen 13.3% in the last twelve months.  In the past, like in the early 1990s and mid-2000s, this type of decline was associated with a housing bust and falling home prices.  But with the brief exception of COVID, the US has consistently started too few homes almost every year since 2007.  So, while multiple headwinds may hold back housing starts, a lack of construction since the last housing bust should keep national average home prices elevated. The encouraging news is that affordability has shown some signs of improvement.  In August, the average 30-year fixed mortgage rate fell to 6.7%, the lowest level since early 2023. This downward trend has continued through the first half of September, with rates easing further to 6.4%. Looking ahead, we anticipate mortgage rates will continue to gradually decline as the Federal Reserve makes modest cuts to short-term interest rates.

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