US single-family homebuilding hits 11-month low; building permits slump

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. single-family homebuilding dropped to an 11-month low in June as high mortgage rates and economic uncertainty hampered home purchases, suggesting residential investment contracted again in the second quarter.

The report from the Commerce Department on Friday also showed permits for future construction of single-family homes tumbled to more than a two-year low last month, aligning with downbeat sentiment among homebuilders. The slump in demand has increased the supply of homes on the market, discouraging builders from breaking ground on new housing projects. New housing inventory is at levels last seen in late 2007.

Though the housing market accounts for a small share of gross domestic product, it has a bigger economic footprint through purchases of furniture and appliances and other activity. There are concerns that protracted housing market weakness could spill over to the broader economy.

Economists said the housing market was in need of lower borrowing costs, but acknowledged that President Donald Trump's aggressive tariffs, which they view as inflationary, made it harder for the Federal Reserve to resume cutting interest rates as soon as this month.

They said the Trump administration's immigration crackdown also is causing labor shortages at construction sites.

"Everywhere builders look there are reasons to delay or scrap projects," said Christopher Rupkey, chief economist at FWDBONDS. "The nation's housing market outlook has never looked this troublesome. This could actually end quite badly for the economy."

Single-family housing starts, which account for the bulk of homebuilding, dropped 4.6% to a seasonally adjusted annual rate of 883,000 units last month, the lowest level since July 2024, the Commerce Department's Census Bureau said.

Homebuilding in that category fell in all four regions, with steep declines in the West and the densely-populated South.

Permits for future single-family homebuilding decreased 3.7% to a rate of 866,000 units, the lowest level since March 2023. There were sharp drops in the South, Midwest and West. But single-family homebuilding permits rose in the Northeast, which accounts for a small share of the housing market.

The U.S. central bank paused its rate cuts in December. Despite Trump's pressure to cut rates, economists expect the Fed to keep its benchmark overnight interest rate in the 4.25%-4.50% range at its July 29-30 policy meeting.

Consumer and producer inflation data for June suggested the import duties were starting to drive up prices for some goods.

Stocks on Wall Street were largely flat. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.

INFLATION EXPECTATIONS FALL

There was, however, some encouraging news on inflation.

A survey from the University of Michigan showed consumers' 12-month inflation expectations dropped to a five-month low of 4.4% in July from 5.0% in June. Long-run inflation expectations fell to 3.6%, also the lowest level since February, from 4.0% last month.

Still, inflation expectations remained higher than in December. Joanne Hsu, the director of the University of Michigan's Surveys of Consumers, said "consumers still perceive substantial risk that inflation will increase in the future."

Consumer sentiment improved slightly this month, but remained well below December's levels when morale soared in the aftermath of Trump's election victory.

The University of Michigan noted there was no boost to sentiment from Trump's sweeping tax-cut and spending bill, which he signed into law earlier this month.

"While tariffs and the administration's recent new threats are casting a hovering cloud of uncertainty over attitudes, consumers and businesses aren't as fearful now," said Oren Klachkin, financial market economist at Nationwide. "Inflation expectations may have fallen further were it not for the uncertainty posed by various existing and new tariff threats."

Trump last week announced higher duties would come into effect on August 1 for imports from a range of countries, including Mexico, Japan, Canada and Brazil, and the European Union. Trump in April slapped a 10% duty on nearly all imports, while giving nations a 90-day period to negotiate trade deals.

Trade policy uncertainty and worries over the country's rising debt load have boosted U.S. Treasury yields, keeping mortgage rates elevated. The average rate on the popular 30-year fixed mortgage has hovered just under 7% this year, data from mortgage finance agency Freddie Mac showed.

A National Association of Home Builders survey on Thursday showed the share of builders cutting prices to attract buyers rose in July to the highest level since 2022.

Starts for housing projects with five units or more soared 30.6% to a rate of 414,000 units in June. This segment is extremely volatile. Overall housing starts rose 4.6% to a rate of 1.321 million units.

Economists polled by Reuters had forecast housing starts would climb to a rate of 1.3 million units.

Multi-family building permits jumped 8.1% to a rate of 478,000 units. That lifted overall building permits 0.2% to a pace of 1.397 million units last month.

The number of single-family houses approved for construction that were yet to be started was unchanged at 148,000 units. The completions rate for that housing segment plunged 12.5% to a rate of 908,000 units, the lowest level since January 2024.

The inventory of single-family housing under construction fell 0.3% to a rate of 622,000 units, the lowest level since February 2021. Residential investment, which includes homebuilding, contracted in the first quarter. It is expected to have remained a drag on GDP in the second quarter.

Goldman Sachs estimated that single-family housing starts would decline 11% this year to 910,000 units.

"While there is still a shortage of single-family housing at the national level, the homeowner vacancy rate has crept higher and homebuilders appear to be responding to the normalizing supply-demand balance," said Ronnie Walker, a Goldman Sachs economist. "The declines in both permits and homebuilder sentiment have been the most acute in the West and especially the South, where supply growth has been the most robust in recent years and where home price growth has been the weakest this year."

(Reporting by Lucia Mutikani; Editing by Paul Simao)