US housing market weakens as AI boom drives factory output

US single-family homebuilding fell sharply in July to its lowest level in more than three-and-a-half years, while contract signings for previously owned homes also declined, highlighting continued weakness in the housing market amid elevated mortgage rates and economic uncertainty.

The housing downturn contrasted with stronger factory activity, as investment linked to artificial intelligence continued to boost production of high-tech equipment and industrial supplies.

Single-family housing starts, which account for the bulk of residential construction, dropped 9.9% in July to a seasonally adjusted annual rate of 808,000 units, the Commerce Department's Census Bureau said on Tuesday, Reuters reported. The figure was the lowest since November 2022 and marked a 15.7% decline from a year earlier.


Permits for future single-family construction, a gauge of upcoming building activity, increased 2.5% to an annualized rate of 894,000 units. They were 1.1% higher than a year earlier, marking only the second annual increase in the past two years. However, the pace of permits remained close to a three-year low.

Reuters reported that elevated mortgage rates are discouraging builders from committing to significant new projects as they contend with completed homes and properties still under construction.

Total housing starts, including multifamily buildings such as apartments, fell 12.4% in July to an annualized rate of 1.239 million units, below economists' expectations of 1.35 million. Overall residential construction permits, however, rose 5.0% to a rate of 1.443 million units, exceeding the 1.37 million forecast.

The weakness extended to the market for existing homes. Contract signings for previously owned homes fell 2.3% in July from the previous month, reaching their lowest level since January, according to the National Association of Realtors.

The housing market continues to face pressure from high borrowing costs and limited affordability. The rate on a 30-year fixed-rate mortgage edged down in the week ended August 7 for the first time since mid-June, but at 6.77% it remained close to its highest level in more than a year.

Builder sentiment also remains subdued despite a recent improvement, with high mortgage rates, elevated construction costs and broader economic uncertainty weighing on the sector.

AI investment boosts factory output

Manufacturing activity presented a starkly different picture, with the Federal Reserve's measure of factory output rising 0.2% in July after an upwardly revised 0.3% increase in June. The index reached its highest level since April 2022.

Reuters reported that industries tied to the artificial intelligence investment boom were among the key drivers of the increase, particularly in durable goods manufacturing. Strong demand for equipment and supplies needed to build and operate large data centres has provided support to the sector.

Business equipment production increased 0.8% in July, led by a 1.5% rise in information-processing equipment and a 1.4% gain in industrial supplies. Semiconductor output climbed 2.4%, while production of computers and peripheral equipment rose 1.8%.

The strength in AI-related investment is also beginning to extend beyond information-processing equipment, potentially supporting a broader range of capital goods and manufacturing activity.

Defence production increased 1.8% as military spending remained elevated amid the U.S.-led war with Iran.

Motor vehicle production, however, weakened, with vehicle assemblies falling to a seasonally adjusted annual rate of 10.42 million from 10.68 million in June. Production of heavy and medium trucks, an indicator of demand from trucking and delivery businesses, also declined to its lowest level since March.

The contrasting performance of housing and manufacturing underscores an uneven U.S. economy, with interest-rate-sensitive sectors struggling while investment tied to artificial intelligence continues to provide momentum for industrial activity.

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