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News Analysis: U.S. new home construction drops to lowest in 17 months amid slowing economy

by Matthew Rusling
2022-08-18 00:57

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by Matthew Rusling

WASHINGTON, Aug. 17 (Xinhua) -- U.S. new home construction hit a 17-month low in July, as the economy slows down amid the Federal Reserve's monetary tightening to curb surging inflation.

New home construction dropped in July amid interest rate hikes and supply problems, indicating the once-booming housing sector has begun to cool down.

Housing starts plummeted 9.6 percent to an annual 1.446 million units. That's the lowest since February 2021, the Commerce Department reported Tuesday.

"It's certainly a much stronger decline than what was expected," Sam Bullard, senior economist at Wells Fargo, a major U.S. bank, told Xinhua.

"That's reflecting higher mortgage rates, elevated inflation and concerns about the outlook, and all those headwinds are clearly pressuring the housing market," Bullard said.

Noting that builders have more inventory on their hands, which will lead to lower, more affordable home prices going forward, Bullard, however, said that "on balance, conditions are still looking rather sour for the U.S. housing market, at least for the foreseeable future."

Home builder confidence has declined for eight months in a row - the worst stretch since 2007, when the housing market took a nosedive and sparked the Great Recession.

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index dropped 6 points to 49 in August. That's under its "break even" point of 50, which occurred for the first time in over two years.

"Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession," according to NAHB chief economist Robert Dietz.

Recent months have seen a substantial slowdown in the previously-booming housing market, as rising interest rates and high prices have made it impossible for many Americans to purchase homes.

The U.S. Federal Reserve is raising rates at the fastest clip in decades, in a bid to battle surging inflation - the worst in 40 years -- and that is impacting the housing sector.

Desmond Lachman, resident fellow at the American Enterprise Institute, told Xinhua that the "very weak" housing start numbers are yet another indicator of "a rapidly deteriorating U.S. housing market" in response to a more hawkish Federal Reserve.

The sharp increase in mortgage rates from less than 3 percent at the start of the year to around 5.5 percent at present "has substantially reduced housing affordability," Lachman said.

That in turn has resulted in a sharp drop in mortgage demand and the start of home price reductions, Lachman said.

On the expectation that the Fed will continue to maintain a hawkish policy stance to regain control over inflation, "further housing market weakness must be expected in the months ahead," Lachman said.

"A weak housing market likely means that overall U.S. economic growth will be modest at best in the remainder of this year," Lachman added.

Brookings Institution Senior Fellow Barry Bosworth told Xinhua that housing starts have a natural countercyclical pattern due to their sensitivity to interest rates.

"Housing construction will likely make a negative contribution to GDP in the third quarter," Bosworth said, speaking of U.S. gross domestic product.

This occurs just a few months ahead of November's midterm elections, and at a time when U.S. President Joe Biden's approval ratings hover near their all-time lows.

The president's job approval stands at 40.2, according to the latest data from the RealClearPolitics' average of polls, and that could spell trouble ahead for Democrats in the lead-up to November's midterm elections.

Clay Ramsay, a senior research associate at the Center for International and Security Studies at the University of Maryland, told Xinhua that housing is a very important issue to a wide swath of voters in the lower half of incomes, many of whom would be expected to vote Democratic.

Politically, the real question is whether Republicans know how to make use of an issue like housing, Ramsay said, adding that the only approach that would be on-brand for them would be to cut taxes that affect builders or create incentives in the tax system.

Brookings Institution Senior Fellow Darrell West told Xinhua that the increased cost of housing "hits many people very hard and makes them worry about their financial future."

"It is one of the reasons voters feel anxious about the economy even though unemployment is at a record low," said West.
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