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Inflation fell more than expected in June. That gave consumers some breathing room, and they kept spending - even if they became more selective about where their money went.
Homebuilders were less optimistic.
Beneath a volatile monthly increase in total housing starts, single-family construction continued to decline. Multifamily construction may be approaching a bottom, but overall homebuilding has fallen back toward its pre-pandemic pace - not nearly enough for a country with a 4.7 million-home housing deficit.
Sadly, the relief may also be temporary. Asking-rent growth has begun to firm, while renewed hostilities in the Middle East have pushed oil prices sharply higher again. If gasoline, transportation and housing costs begin rising, households will have less money available to spend elsewhere.
The housing report looked stronger at first glance. But almost all of the monthly increase came from the volatile multifamily sector.
Starts of buildings with five or more units surged from an annualized pace of 291,000 in May to 513,000 in June. The increase followed an unusually weak month and should not be interpreted as the beginning of a new apartment-building boom. Averaging across the quarter, multifamily starts remained about 5% lower in the second quarter than in the first.
Single-family construction continued to move in the opposite direction. Single-family starts fell 0.2% from May to June to an annualized pace of 895,000. Single-family building permits, a measure of future construction, fell 2.4% over the month to an annualized pace of 871,000.
While single-family keeps falling, there are reasons to believe the multifamily downturn may be approaching a bottom.
The national rental vacancy rate was 7.3% in the first quarter, statistically unchanged from 7.2% in the previous quarter and 7.1% a year earlier. Rent growth has also begun to firm.
Together, those figures suggest that the apartment market is gradually absorbing the wave of units started during the pandemic-era construction boom. Completions and rental demand are moving closer to balance, and developers may no longer need to reduce construction at the same pace.
That is stabilization, not recovery.
The housing deficit stopped growing, but it did not shrink
The national housing deficit held at approximately 4.7 million homes in 2024. The deficit grew by just 43,000 homes, down sharply from an increase of 159,000 in 2023 and 257,000 in 2022.
That was an important milestone.
Approximately 1.4 million homes were added on net during the year, bringing new housing supply roughly into balance with the growth in families needing homes. For the first time since the housing crisis, construction kept the national housing deficit from getting materially worse.
But the accumulated gap did not shrink.
The deficit is also concentrated in some of the country's most expensive metropolitan areas. New York, Los Angeles, Boston, San Francisco and Washington had the largest estimated deficits in 2024. These are also among the markets where relatively few homes listed for sale are affordable to a household earning the local median income.
The plateau shows that closing the deficit is possible. When more homes were built, the deficit stopped worsening.
But not getting worse is not the same as getting better. The latest decline in construction threatens to reverse the limited progress made in 2024.
A country short of 4.7 million homes cannot solve its affordability problem by building at the same pace it did when the deficit was still getting larger.
Mortgage rates remain in the mid-6% range, keeping monthly payments beyond the reach of many potential buyers. The average 30-year fixed mortgage rate was 6.55% during the week ending July 16.
Builders have responded with incentives and price cuts. In July, 37% of builders reported cutting prices, with an average reduction of 6%. Another 63% were offering sales incentives.
The homebuyer affordability challenge leaves builders with very little pricing power.
At the same time, the cost of financing, materials, labor and land has risen and remains elevated. When the cost of producing a home rises but buyers cannot afford a higher sale price, builders have to absorb the difference.
That is margin compression.
If the expected return on a project becomes too small, builders delay it, reduce its size or do not begin it at all. That helps explain why permits and single-family starts are falling even though the country remains millions of homes short of what is needed for every family in the United States.
Public policy is part of the problem -- there is no single culprit.
Borrowing costs remain elevated. Long-term rates reflect inflation expectations, expected future monetary policy and the amount of federal debt investors are being asked to absorb.
Recent Federal Reserve research finds that increases in expected federal debt raise longer-term neutral rates and the term premium on Treasury securities. Those higher Treasury yields increase the cost of long-term credit for households and businesses.
That means elected officials in Washington share responsibility for high borrowing costs.
Trade policy adds another layer.
Homebuilders have received partial protection from some tariff actions, but they have not received a blanket exemption for building materials. Separate duties remain on Canadian lumber, steel, aluminum, cabinets, appliances and other products used in residential construction. The National Association of Home Builders (NAHB) had been urging the White House to exempt building materials and support legislation that would create a formal exclusion process.
And builders can face higher costs even when they purchase supplies from a company based right here in the United States.
Mortgage rates are already around 6.5%, buyer traffic is weak and more than one-third of builders are cutting prices. Raising home prices enough to recover their higher costs could mean losing the sale altogether. So builders absorb more of the cost. When the margins no longer work, they pull back.
Orphe Divounguy is an economist with Zillow and the co-host of The Center Square's Everyday Economics podcast.