Single-Family Home Construction Falls Sharply Ahead of Fed Meeting as Builders Seek Rate Relief

Single-family home construction declined in August as builders pulled back in the face of weak demand and hoped for relief from a Federal Reserve rate cut.

Construction starts on single-family homes fell 7% last month from July to a seasonally adjusted annual rate of 890,000, the U.S. Census Bureau and Department of Housing and Urban Development reported Wednesday. The August figure was down 12% from a year earlier.

Multifamily starts, which are more volatile, dropped 12% on the month to an annualized 417,000, although that figure was up 8.9% from a year ago.

"All things considered, this month’s new-construction data points to a market that is still under strain," says Realtor.com® Senior Economic Research Analyst Hannah Jones. "Supply will likely tighten further down the road, unless demand conditions improve and permit activity stabilizes."

The pullback in construction comes as homebuilders face rising inventory and increasingly turn to price cuts and incentives to woo reluctant homebuyers.

“Housing affordability is hurting buyer traffic for builders, and as a result builders have slowed single-family home construction,” says Buddy Hughes, chairman of the National Association of Home Builders (NAHB). 

New survey data this week showed that while builders remain pessimistic about the current housing market, they are hopeful that a Fed rate cut this week will revive their fortunes.

“With the Fed expected to reduce the federal funds rate later today, this return to monetary policy easing will help the mortgage market indirectly and lead to lower interest rates for building and land development loans, which will help builders to boost housing production,” says NAHB Chief Economist Robert Dietz.

Mortgage rates have been falling in recent weeks in anticipation that the Fed will cut its benchmark overnight interest rate on Wednesday, marking the central bank's first rate cut in nine months.

Permits slump to post-pandemic low

Residential building permits, a sign of future construction, continued to wane in August, dropping 3.7% from July to a seasonally adjusted annual rate of 1,312,000. On an annual basis, permits were down 11%.

Permits have been falling steadily since March, as homebuilders have grappled with multiple headwinds including rising materials costs, tariff uncertainty, elevated interest rates, and tepid demand from homebuyers.

The five-month streak marks the longest stretch of declining permit activity since late 2008, when the housing crash and Great Recession all but halted new building activity.

The permitting slowdown affected both single-family and multifamily projects. Single-family permits fell 2.2% from July, reaching 856,000 units, 11.5% lower than one year prior.

Multifamily permits dropped 6.4% on the month to 456,000, down 10% from a year earlier.

Only the West saw a monthly pick-up in total permitting, with a 9.5% rebound, led by multifamily permits. All four regions saw permits fall annually, ranging from a 3.8% annual drop in the West to a 15% drop in the South. 

Total permits are now at their lowest level since May 2020, when the COVID-19 pandemic caused a sharp pullback in construction activity.

"This month’s data highlights the persistent challenges facing builders," says Jones. "Still, recent research shows that many builders are working to boost affordability and attract buyers through incentives such as mortgage rate buydowns. Builder sentiment has steadied in recent months near recent lows, underscoring the difficult market conditions shared by buyers, sellers, and builders alike."