Housing Notes: Rates Will Rise as Housing Activity Varies

The Fed is expected to raise rates 

The futures market tracking FOMC rate decisions on the Chicago Mercantile Exchange thinks it’s a foregone (90.7 percent) conclusion that the FOMC will raise rates by 25 basis points. While there is no direct connection to mortgage rates, it often influences the direction. In fact, some ex-Fed experts suggest there is a growing chance of a 50 basis point jump.

Mortgage rates have shifted since the start of the Iran War on February 28, and the 30-year rate is set to crack 7 percent soon; some rate indices already show it. I go with the Freddie Mac survey. This rate environment will continue to provide a drag on housing sales volume, especially new construction across the US.

Permits (up)→Starts (down)→Under Construction (down)→Completions (down)

The above headline represents the flow of new residential construction activity.

The latest Census/HUD residential-construction release showed a pronounced July pullback in housing starts. The total privately owned housing starts fell 12.4 percent month over month to a seasonally adjusted annual rate of 1.239 million units, down 13.5 percent from July 2025. The next update comes out tomorrow morning, but I wanted to address the direction of these results before the report, especially since the Fed is announcing higher rates this afternoon.

The single-family figure was particularly weak, seeing its slowest pace since 2022, and it accounted for roughly half of the monthly decline. Single-family starts fell 15.7 percent annually, while multi-family starts fell 7.1 percent. And it makes sense. Rising interest rates with no end in sight and high odds of a Fed rate increase cast significant uncertainty over the new construction space.

Housing completions fell 16.8 percent in July year over year, suggesting the July slowdown hit both new construction activity and the near-term flow of homes being delivered. Yet permits rose 3.1 percent year over year, with single-family starts up 2.5 percent and multi-family starts up 7.3 percent. With everything seeming to fall, why are permits rising?

The increase in building permits should not be read as a vote of confidence in a higher-interest-rate environment. A permit is an option to build, not a commitment to pour concrete immediately. Permits are relatively low-cost options for future development. Builders can preserve the right to build before approvals lapse, fees rise, or local rules change, without yet committing the much larger sums required for land development, construction loans, labor, and materials.

The simultaneous decline in housing starts and completions points to concerns at the execution stage. Developers may see eventual demand, particularly where housing inventories remain constrained, but are postponing groundbreakings while elevated borrowing costs, weaker affordability, uncertain sales absorption, and construction-financing risk make immediate projects less attractive. In that sense, rising permits can signal a longer-run belief in housing demand, while falling starts signal near-term restraint.

Here’s more on permitting.

Raleigh finishes construction before San Francisco approved it

American Inequality is a terrific Substack that I enjoy exploring. The author recently shared a white paper exploring development speed, measured by the difference between permits and starts, in Where Is Housing Slow to Build, And Is It Getting Slower?

Here’s the paper’s summary abstract:

We estimate permitting and development timelines for standardized new housing projects across 60 U.S. cities from 2000 to 2025. We report three new facts. First, the fastest cities complete projects in the time the slowest cities take to merely approve them. Second, across cities, permitting duration is positively associated with housing prices and negatively associated with production. The strength of these relationships rivals that of other measures of land-use regulation and suggests a high cost of delay. Third, permitting duration has risen steadily over time, whereas total project duration has fluctuated cyclically.

The differing speeds of permitting by location were top of mind for me after observing the disparity in listing inventory coming out of the pandemic. Initially, listing inventory across the US was scarce everywhere because there just wasn’t enough. Demand after the COVID lockdown was supercharged and burned off supply faster than it could be replaced. Today, the Northeast and Midwest generally remain short on supply, while the Sun Belt has more supply and the West is somewhere in between.

US new construction showed a sharp falloff of starts in July, so this paper, Where Is Housing Slow to Build, And Is It Getting Slower? clearly showed some of the problems with the construction process by submarket. Working in Manhattan, I always assumed we were the slowest new-construction market in the US, with most multifamily projects taking ±4 years to develop. But San Francisco and Miami seem even slower. The idea that Raleigh, North Carolina, can complete a project faster than San Francisco can approve a project is mind-boggling. This constrains supply and keeps housing prices higher in the locations that can’t respond quickly to changes in demand.

Final Thoughts

A combination of demand-side and cost-side pressures that are bringing down housing activity:

Demand Side

• Mortgage rates are near 7 percent as 10-year Treasuries exceed 5 percent for the first time in a while, keeping many buyers on the sidelines.
• Record-high home prices combined with slower sales are forcing houses to sit on the market longer, and fewer buyers are bidding above asking.
• Rising mortgage rates are pushing up rental prices as consumers hold off on purchases.
• General economic uncertainty, including geopolitical strain from the U.S.-led conflict with Iran, and the trade war with Canada as well as tariffs across the country, despite being ruled illegal across the country, are weighing on both builder and buyer confidence.
• New-home supply is elevated (over 9 months at the current sales pace), so builders are relying on price cuts and incentives rather than building more houses.

Supply Side

• Rising construction costs, including materials, gas, and diesel
• Persistent labor shortages in the trades
• Elevated financing/construction-loan costs on top of high mortgage rates

We are experiencing a fairly classic cyclical downturn, driven by high mortgage/financing rates, elevated existing inventory in some locations, rising costs, and a whole lot of economic uncertainty. I’m afraid we are stuck in this mode for a few years until we focus on ending excessive federal government spending (it’s up 10 percent YOY, hitting a record 50 trillion dollars, our war with all other countries using tariffs as a weapon (which punishes US consumers as a tax), and the Iran War is resolved (which places higher costs on all aspects of the economy that rely on transportation.

Good grief.

The Actual Final Thought – When I think of pizza…