Higher mortgage rates continued to dampen housing market activity as permits for new construction fell and single-family homebuilding in the United States fell to a 2-1/2 year low in November.

The somber report from the Commerce Department on Tuesday came soon after the announcement on Monday that homebuilders’ confidence had dropped for a record-breaking 12th consecutive month in December. As the Federal Reserve fights inflation, the housing market has taken the brunt of the Fed’s quickest cycle of rate increases since the 1980s.

According to Christopher Rupkey, chief economist at FWDBONDS in New York, “the Fed’s rate hikes are doing what they are supposed to, further deepening the recession in the residential housing construction markets. There’s nowhere for home builders to hide. We don’t know about the rest of the economy, but the housing market is clearly in recession.”

Single-family housing starts, which make up the majority of new construction, fell 4.1% last month to a seasonally adjusted annual rate of 828,000 units. Since May 2020, when the economy was in shambles due to the first wave of the COVID-19 pandemic, that was the lowest level.

The South and Midwest, which are regarded as the more affordable regions, saw a decline in the construction of single-family homes. In the Northeast and West, it got worse.

The rate of housing project starts for buildings with five units or more increased by 4.8% to 584,000 units, the highest number since April.

Strong demand for rental housing, which is being forced to remain vacant by skyrocketing mortgage rates, is fueling the development of multi-family housing.

According to data from mortgage financing company Freddie Mac, the 30-year fixed mortgage rate spiked to above 7% a few months ago, the highest level since 2002. The rate is double what it was at that time a year ago, despite the fact that it has since decreased to an average of 6.31% last week.

Rates may begin to rise after the Fed indicated last week that it would continue raising rates through the end of 2023, which caused Treasury yields to soar. Mortgage rates follow the same trend as Treasury yields.

The National Association of Home Builders (NAHB)/Wells Fargo housing market index dropped to its lowest point since June 2012, excluding the decline during the early stages of the pandemic in the spring of 2020, according to data released on Monday showing that confidence among single-family homebuilders fell for a record-breaking 12th consecutive month in November.

The increase in multi-family housing projects helped to partially offset the negative impact of single-family housing units, resulting in a 0.5% decrease in overall housing starts last month to 1.427 million units. Reuters polled economists, who predicted that starts would decline to a rate of 1.400 million units.

But there are some cracks beginning to appear in multi-family housing. The number of permits for residential construction projects with five units or more decreased 17.9% to 509,000 units, the lowest number since May 2021. Building permits for single-family homes fell 7.1% to 781,000 units, the lowest number since May 2020.

Permits overall for new home construction fell 11.2% last month, to 1.342 million units.

Higher mortgage rates combined with a decline in single-family home construction could exacerbate the housing shortage already present and slow the rate at which home prices are falling.

According to Nicole Bachaud, an economist at Zillow in Seattle, “the limited available inventory fueled by both existing homeowners and homebuilders will keep the market tight, price declines minimal, and competition for desirable homes alive.”