Single-Family Home Construction Sagged in June. Why That’s Not All Bad.

Housing starts were the lowest in nearly a year in June. (Justin Sullivan/Getty Images)

Construction on new single-family homes weakened in June—bad news for buyers hunting for deals but a potentially positive sign for investors waiting for builders’ margins to bottom.

Single-family housing starts, a measure that reflects the beginning stages of building a new home, fell to a seasonally adjusted annual rate of 883,000 in June, its slowest pace in nearly a year. Issuance of permits, which indicates how builders see the outlook for demand by measuring units authorized for construction, fell to a rate of 866,000, the lowest since March 2023.

It has been a tough year for the industry as mortgage rates have remained high and economic uncertainty has pushed many buyers to the sidelines, even as more homes have come on the market. That has necessitated continued incentives and discounts to get prospective buyers to pull the trigger, weighing on companies’ margins.

The iShares U.S. Home Construction exchange-traded fund was down 7.4% this year as of Thursday’s close, according to Dow Jones Market Data.

Perhaps counterintuitively, a pullback in starts could signal a shift in strategy that is favorable for investors, if problematic for buyers.

“There’s a fear that just the builders are just going to keep pumping through inventory at all costs,” said Raymond James analyst Buck Horne, who argued that sales incentives “are effectively a price cut.”

The industry is showing a willingness to pull back on construction, Horne added. Investors “just want to see some visibility that margins will find a bottom point pretty soon, and that […] they are willing to pull back on volume a little bit to maintain profitability,” he said.

A pullback in new-home construction could lead to less need for sales incentives. The majority of builders, 62%, said they offered some sort of incentive in July, the National Association of Home Builders said earlier this week.

Reduced home construction would be cold comfort for buyers contending with still-high costs. Fannie Mae earlier this month reported that 71% of respondents to its consumer survey said June was a bad time to buy a home.

A big improvement for the sector still depends on mortgage rates, said UBS analyst John Lovallo. “If we do get stability in rates and, man, if we actually got a little bit of decline in rates from here, there’s a lot of leverage in that margin that could come back as incentives are rolled back a bit,” he said.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com