The high mortgage rates in the United States continue to suppress the recovery of the housing market: new housing starts in July plummeted by 12.4%, falling far short of expectations, with single-family home construction reaching its lowest level since 2022.

Data released on Tuesday by the U.S. Department of Commerce's Census Bureau showed that the annualized total of new housing starts in July plummeted to 1.239 million units, significantly lower than the market expectation of 1.35 million units, and a substantial decline of 12.4% from the revised June figure of 1.415 million units. Previously, the June new housing start data had been revised upwards, indicating a month-on-month increase of 19.7%. This latest data not only fell well below the estimates of all economistsranging from 1.3 million to 1.483 million units by 49 economistsbut also exceeded the market forecast of a -5.9% decline by a wide margin. Following a brief recovery in early summer, housing construction activity in the U.S. is cooling at a much faster pace than expected. Single-family homes lead the decline: 808,000 units hit a new low since November 2022 Structurally, single-family homes, which represent the largest share of residential construction, are the main contributor to this decline. In July, the number of single-family housing starts fell by 9.9% month-on-month, bringing the annualized rate down to 808,000 units, the lowest level since November 2022. This marks the weakest month for single-family home construction since 2022. The drop in multi-family housing was even more severe. Following significant growth in the previous month, the number of multi-family housing starts fell nearly 17% month-on-month in July, indicating that previously delayed projects for apartments and condominiums are being rapidly absorbed, while new project launches have not kept pace. Regionally, housing starts in the southern, midwestern, and western regions of the U.S. all declined, with only the northeastern region showing improvement due to the advancement of multi-family residential projects. Unexpected increase in building permits: a rare divergence between starts and permits In stark contrast to the dismal housing start data, building permitsa leading indicator of future construction activityrose by 5% month-on-month in July, reaching an annualized rate of 1.443 million units, well above the market prediction of 1.37 million units. Among these, single-family permits grew by 2.5% to 894,000 units, while permits for five or more multi-family units surged by 9.1% to 490,000 units. The significant divergence between housing starts and permits sends mixed signals. The increase in building permits suggests that developers still retain some confidence in future demand and are continuing to apply for permits for upcoming projects. However, the sharp decline in starts indicates that builders are facing increasing challenges between the stages of "obtaining permits" and "breaking ground." These challenges stem primarily from the cost of financing. Even with government construction permits in hand, the financial viability of projects continues to deteriorate in the current high-interest-rate environment. The dual squeeze of high rates and high home prices The sharp cooling in residential construction in July is primarily rooted in the sustained shrinkage of demand. The continuous rise in mortgage rates is the main suppressing factor. Since the outbreak of the Iran War, mortgage rates have kept climbing. According to data from Freddie Mac, as of the week ending August 14, the average rate for a 30-year fixed-rate mortgage in the U.S. had risen to 6.81%, the highest level in over a year. Overall mortgage applications fell by 2.9% compared to the previous week and decreased by 5% year-on-year. On July 30, the 30-year fixed rate had reached 6.66%, marking a new high for the year. The impact of high rates on homebuying willingness is systemic. Although the NAHB reported a slight rise in the August Housing Market Index to 35, it remains well below the neutral line of 50. Builder confidence continues to be low, reflected in the ongoing contraction of housing start data. At the same time, high home prices and rising construction costs continuously squeeze developers' profit margins. The input prices for residential construction are 6.2% higher than a year ago. Against the backdrop of high financing costs and rising construction expenses, builders are increasingly cautious about launching new projects. Home Depot, Inc.'s warning: large home improvement projects remain "on hold" The weakness in the residential construction market is also reflected in the performance of the home improvement retail giant. Home Depot, Inc. (HD.US) announced its second-quarter financial results on the same day, providing evidence of the real state of the residential market. Home Depot, Inc. reported a 5.7% year-on-year increase in revenue to $47.86 billion for the second quarter, surpassing analysts' expectations. However, this growth is primarily driven by consumer spending on small repair and maintenance projectssuch as repainting rooms and adding plants to gardensrather than large renovation projects. Home Depot, Inc. Chief Financial Officer Richard McPhail stated during the earnings call that the real estate market has not yet recovered, and large home improvement projects remain in a "frozen" state. This assessment resonates with the July data that saw single-family housing starts drop to their lowest level since 2022both new construction and large-scale renovations are stalled due to high rates and costs. Despite a solid performance in the quarter, Home Depot, Inc. maintained its guidance for total sales growth of about 2.5% to 4.5% for the year, reflecting management's lack of confidence in the residential market outlook. Neil Saunders, managing director of GlobalData, pointed out that while spending on small projects is encouraging, it is insufficient to offset the overall malaise in the residential market. Outlook: Chain reactions from a decrease in projects under construction The July data has multiple implications for the broader economy. Weakening residential investment could drag down economic growth in the third quarter. More importantly, the number of construction completions is also declining in tandem. The total number of homes completed in July fell to 1.212 million units, down from 1.333 million in June. The number of single-family completions also dropped to the lowest level since 2020. The decrease in projects under construction means that the inventory of new homes available for sale will continue to remain tight. While demand is suppressed by high interest rates, the contraction on the supply side will further exacerbate the long-standing housing affordability crisis in the U.S. The only encouraging signal comes from building permitsthe 5% increase indicates that developers' expectations for future demand have not completely collapsed. But as one analyst stated, "Permits are permits, and breaking ground is breaking ground the gap between the two precisely highlights the real constraints that builders currently face." As long as mortgage rates remain above 6.8% and financing costs do not show a significant decline, the conversion from permits to starts will continue to be hindered.