Millions of millennials are hitting their prime child-rearing years and looking for a place to live. The Federal Reserve is determined to bring inflation down using high interest rates. Those forces are coming to a head in the U.S. housing market.

Why it matters: The standoff is creating a housing affordability crisis. Builders are faced with the dilemma of whether to construct houses that buyers may need help to afford, given 7%+ mortgage rates, or to hold back and therefore make long-term housing supply issues worse.

Driving the news: New data out this morning showed housing starts in August fell 11.3% from July. That was disproportionately driven by a drop in multifamily units like apartments and condos, but starts of single-family homes fell by 4.3%, too.

• Builders started work on new single-family homes at a 941,000 annual rate in August, which is 16% below the average pace of construction from mid-2020 to mid-2022.
• That aligns with a survey out yesterday from the National Association of Home Builders showing a steep decline in builders' confidence.

What they're saying: "High mortgage rates are clearly taking a toll on builder confidence and consumer demand, as a growing number of buyers are electing to defer a home purchase until long-term rates move lower," Robert Dietz, NAHB's chief economist, said in the release.

State of play: In June, the S&P/Case-Shiller national home price index reversed a short-lived dip in home prices, essentially returning to its all-time high from a year earlier (it was 0.02% lower, if you want to be pedantic).

By the numbers: It adds up to an affordability crisis. Imagine a house that cost $500,000 two years ago and a family taking out a mortgage for 80% of the purchase price. At the then-national average 30-year fixed mortgage rate of 2.86%, the monthly payment would have been $1,656.

• A 13.5% run-up in home prices since then (the national average per the Case-Shiller index) would push that home's price to $568,000. A surge in rates to 7.18% last week thus results in a monthly payment of $3,077 for the same house.

The bottom line: The broken housing market right now shows a downside of relying so heavily on interest rate policy to guide the economy.

• The only solution is more supply, but it won't be forthcoming as long as homebuilders are skittish about rates and affordability.

Go deeper

In case you missed it, our Axios Markets colleague Matt Phillips had a great rundown this morning of some reasons to think that a recession-free soft landing for the economy is not in the cards.

• The narrative has become closer to conventional wisdom in recent months, with leading forecasters marking down their recession odds.

Yes, but: As Matt notes, several forces at play could undermine that story, including a recent surge in energy prices, increasingly tapped-out consumers and the lagged effect of banks tightening credit.

Our thought bubble: Thinking through the risks cataloged in the piece, we see an increasingly persuasive case for the "rolling recession" narrative, in which the different pockets of the economy experience pain sequentially.

• We've already been through downturns in housing, tech, banking and, to some degree, manufacturing.
• Problems in consumer-driven sectors, commercial real estate, energy-intensive industries and more could be on tap.

The bottom line: Whether the damage ever adds up in any short period to create an official recession — a period of contracting employment, declining industrial production and so on — is still an open question.

• But bad things can happen in the economy without it being a recession, especially if they don't all happen at once.