Overall construction on new homes, which includes single-family residences and buildings with multiple units, rose 0.91% in last month to a seasonally adjusted annual rate of 891,000. Builders however are being cautious. The overall result disappointed economists who had expected a starts rate of 921,000, compared to an originally estimated rate of 896,000.

New Housing Starts Up Slightly, New Permits Taper Off

Longer-term trends pointed to a continuing rebound in construction. Starts in August were up 18.96% from the same period in the prior year. Still, there’s concern that rising mortgage rates are slowing down the housing market’s recovery. Mortgage rates started increasing in early May on speculation about potential tapering of the Federal Reserve’s massive bond-buying program. Although mortgage rates remain relatively low by historical standards, they have increased more than one percentage point since early May.

Surprising markets, the Fed announced this week that it won’t start tapering yet. Home-builder stocks jumped after the announcement. The Fed made its no-taper decision because it was 'spooked' by the rise in interest rates over the past few months and the impact on the housing market.

Indeed, there are signs that the recent rise in rates hit the housing market more than had been expected. Over the last few months reports show that rising rates led to a drop in mortgage applications. However, there’s been a far larger decrease among those who would like to refinance than those who would like to buy. Economists predict the demand for homes can survive at the current level of mortgage rates.

There was good news behind the disappointing headline number on construction starts. Building permits for single-family homes, a sign of future demand, rose 3% to the highest level since May 2008. Overall building permits fell 3.77% in August to an annual rate of 918,000, while permits in buildings with at least five-units dropped 15.70%.

Also builders spend more to construct single-family homes than they do to build apartments, so August’s increase in single-family-home construction starts is particularly welcome. In August, starts for single-family homes rose 7%, while starts in buildings with at least five units fell 9.4%. Single-family homes are also a larger share of the new-construction market than apartments.

The upside in the single-family category pointed to stronger construction spending in August despite the lower than expected overall starts result.