Housing slump takes deepest cut from U.S. GDP since end of 2007

Houses in the Cavanaugh subdivision of Meridian, Idaho, US, on Thursday, June 30, 2022. The housing market slowdown is having ripple effects across the industry and mortgage lenders are forecasting a slump in business.

Jeremy Erickson/Bloomberg

The collapse in U.S. home construction during the third quarter took its biggest chunk from gross domestic product in nearly 15 years as surging mortgage rates dealt a hammer blow to demand.

Residential investment plunged an annualized 26.4% during the period, marking the sixth-straight quarterly decline, government figures released Thursday showed. The slump subtracted a whopping 1.37 percentage points from GDP, the most since the final three months of 2007 and the start of the Great Recession.

The string of decreases in residential construction follows some of the strongest gains on record in 2020, when ultra-low borrowing costs and the remote-work boom fed a growing appetite for new housing. 

Mortgage rates have spiked this year in a sharp and rapid shift as the Federal Reserve takes steps to combat decades-high inflation. The average 30-year mortgage rate topped 7% this week for the first time since 2002, Freddie Mac data showed Thursday.

The decline in housing investment was driven by a 36.6% annualized drop in construction of single-family homes, the steepest slide since the second quarter of 2009. The figures dovetail with a government report last week showing the weakest pace of one-family homebuilding since the spring of 2020, when the economy was still reeling from Covid-imposed lockdowns.