Falling Homebuilding Permits Suggest Troubles Ahead for US Economy
Plunging residential building permits signals troubles ahead for the U.S. economy, according to economist Mark Zandi, as developers desist from new construction amid a glut of unsold homes across the country.
“Building permits have been identified as the most critical economic variable for predicting U.S. recessions, according to Moody’s new leading economic indicator built using a machine learning algorithm,” Zandi wrote on X.
“And while permits had been holding up reasonably well, as builders supported sales through interest rate buydowns and other incentives, inventories of unsold homes are now high and on the rise,” he added. “In response, builders are pulling back, and permits have started to slump. They are now as low as they’ve been since the pandemic shutdowns.”
What Do the Latest Figures on Residential Permits Show?
Single-family housing starts—the number of new such residential projects that began last month—dropped 6 percent year over year and 7 percent month over month in August to a seasonally adjusted annual rate of 890,000 units, according to the latest Commerce Department’s Census Bureau report.
It was the lowest level since April 2023, indicating deep discouragement among homebuilders at a time when many are struggling to place their finished homes on an oversaturated market.
Construction workers building a new home on a property that burned in the Eaton Fire in Altadena, California, on August 15.
Mario Tama/Getty Images
Starts for housing projects with five units or more fell by 11 percent to a rate of 403,000 units in the same month, while overall housing starts plunged by 8.5 percent to a rate of 1.307 million units.
Permits for future single-family homes—by far a majority of the properties on the U.S. market—also fell month over month by 2.2 percent to a rate of 856,000. Total building permits dropped by 11.1 percent compared to August 2024 to a rate of 1,476,000.
What Does This Mean for the U.S. Housing Market?
A slowdown in new construction across the U.S. is hardly surprising considering that the national market has come to a slowdown in recent months, as inventory has grown due to dwindling demand among Americans struggling to keep up with sky-high home prices and elevated borrowing costs.
“Homebuilders have exercised caution this year, facing low buyer demand, tariff uncertainty, and labor disruptions,” Hannah Jones, a senior economic research analyst at Realtor.com, said in a comment shared with Newsweek.
At the moment, homebuilders across the country are facing the problem of selling the homes they have already built. According to the latest data by the National Association of Home Builders (NAHB), 66 percent of builders across the country are offering incentives on new homes, while many are also cutting prices.
“All things considered, this month’s new-construction data points to a market that is still under strain,” Jones said. “August’s release shows that builders are pulling back on future projects even as they push to complete existing ones. Supply will likely tighten further down the road, unless demand conditions improve and permit activity stabilizes.”
Demand could improve, Jones said, as a result of falling mortgage rates. Several experts expect mortgage rates to fall to 6 percent in the coming months, following the Federal Reserve’s first rate cut in nine months earlier this week.
While lower mortgage rates cannot solve all the U.S. housing market’s affordability problems, they could help get some prospective buyers off the sidelines.
“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,” said NAHB Chief Economist Robert Dietz in a statement earlier this week.
And for the U.S. Economy?
Zandi and Moody’s Analytics estimated that the U.S. economy had an “uncomfortably high” 48 percent probability of slipping into a recession in the next 12 months. “It’s less than 50 percent, but historically, the probability has never gotten this high, and a recession has not ensued,” Zandi wrote on X.
In part, this has something to do with the U.S. housing market, which Zandi previously described to Newsweek as “very troubled.”
“Obviously, it’s been troubled since mortgage rates went up,” he said, adding: “Most of the problems have been with regard to sales. They’ve been very depressed because of the interest rate lock, the housing lock. But the thing that’s going to be problematic, and this adds to the concerns about a recession here in the second half of the year going into next, is homebuilding.”
“Single-family homebuilding has held up well as builders have been able to use interest rate buy-downs and other incentives to maintain sales. But that’s no longer working,” Zandi said.
He continued: “The inventories of unsold homes are now as high as they’ve been since. I do think homebuilding is gonna weaken here very significantly, and that’s just another reason to be nervous about the economy’s staying power and getting through this without going into recession.”