(Bloomberg) -- New US home construction dropped in August to the lowest level since June 2020, highlighting the toll of declining housing affordability.

Residential starts decreased 11.3% last month to a 1.28 million annualized rate, according to government data released Tuesday. The drop was largely driven by a sharp decline in multifamily construction.

Applications to build, a proxy for future construction, picked up to 1.54 million. That’s the most in nearly a year. Permits to build one-family homes accelerated to the fastest pace since May 2022, indicating optimism about future demand.

The recent pickup in mortgage rates has helped drive housing affordability to record lows, suppressing demand. Mortgage applications for home purchases are now at levels not seen since the mid-1990s, and it’s not clear when borrowing costs will subside.

With homeownership out of reach for even more Americans, builder sentiment has soured to a five-month low. That said, with existing-home inventory still extremely limited, there’s opportunity for builders to capture more prospective buyers.

What Bloomberg Economics Says...

“Multifamily units drove the increase in housing permits in August as mortgage rates above 7% push many prospective buyers out of the market for single-family homes.”

— Eliza Winger

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Multifamily construction plunged to the lowest level since the onset of the pandemic, while applications for those projects increased by nearly 16%, the most in over a year.

On a regional basis, housing starts slumped in all regions but the Northeast, with the West experiencing the sharpest decline. That was probably tied to Hurricane Hilary, which battered California last month, Oxford Economics said in a note. 

Data on both existing- and new-home sales due later this month will provide further clues about the outlook for the US housing market.

--With assistance from Augusta Saraiva and Chris Middleton.

(Adds economists’ comments)

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