US housing starts fall to lowest level since 2020 in worrying sign for the economy

• August US housing starts fell to its lowest level in three years in a worrying sign for the economy.
• The slowdown in homebuilding activity comes as mortgage rates continue to linger above 7%.
• "The sharp drop in housing starts is concerning because housing has been one of the pillars of the economy that has held up," a CIO said.

A slowdown in homebuilding activity suggests higher mortgage rates are starting to take their toll on an important part of the economy.

US housing starts, which refers to the beginning of construction of a new home, plunged 11% in August to 1.23 million, representing its lowest level since June 2020. The results were lower than economist expectations of 1.44 million units.

The sharp slowdown comes as the average mortgage rate continues to linger above 7%, suggesting that the lagging nature of higher interest rates is starting to catch-up to an area of the economy that has been resilient.

"The sharp drop in housing starts is concerning because housing has been one of the pillars of the economy that has held up much better than expected," Independent Advisor Alliance chief investment officer Chris Zaccarelli said in an e-mail to Insider.

"If it turns out that this is the first crack in an otherwise bulletproof consumer then it could change the narrative from an economy that is impervious to rapid interest rate hikes to one that is vulnerable and susceptible to a recession," Zaccarelli said.

Rising interest rates has made buying a home significantly less affordable than it was just a couple years ago, and that's led to some prospective homebuyers getting cold feet at the last minute. About 16% of home sale deals were canceled in August, according to Redfin.

"I've seen more homebuyers cancel deals in the last six months than I've seen at any point during my 24 years of working in real estate. They're getting cold feet," Jaime Moore, a Redfin real estate agent said last week.

The drop in housing starts coincides with a decline in homebuilder sentiment, which fell in September to its lowest level since April.

But there was one sign of hope for the economy in the August report of housing starts, and that's the fact that housing permits jumped 7% to 1.54 million.

LPL Financial chief economist Jeffrey Roach told Insider the rise in housing permits suggests "that single-family construction starts will likely rebound in the coming months if builders can keep their skilled labor."