Housing Market Gets Bad News as Construction Drops

The housing market received disappointing news Thursday after government data showed that the building of new homes fell across the board in May, worsening the supply challenges buyers are facing when trying to purchase a home.

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In March 2022, the Federal Reserve began hiking interest rates to counter inflation, and the housing market has been grappling with high borrowing costs as a result. Policymakers have indicated that they are prepared to maintain elevated interest rates for a while longer as inflation—which stands at a two-decade high of 5.25 to 5.5 percent—has been slow in decelerating to the central bank’s 2 percent goal.

Housing starts, which indicate the beginning of new construction on homes, plunged 19 percent in May compared to a year ago. From April, it declined by 5.5 percent to about 1.28 million, the U.S. Census Bureau said. Meanwhile, completed homes ticked up 1 percent to 1.5 million from a year ago, but that figure was down more than 8 percent from the prior month. Building permits, an indicator of what could be coming down the pipeline, was 9.5 percent lower than in May 2023 and declined, month over month, by 3.8 percent to 1.39 million, the data showed.

“[Housing starts] were the weakest since the pandemic shut down large swathes of the economy in early 2020,” Bill Adams, the chief economist at Comerica Bank, said in a note shared with Newsweek.

“The drop in housing activity is largely due to a plunge in multifamily construction,” Adams said. “Multifamily building is much more affected by interest rate fluctuations than single-family building.”

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Builders appear despondent, saying they are feeling the effects of the high costs of loans, which has dissuaded buyers from taking on expensive mortgages and has made capital for construction expensive. In June, builder confidence, as measured by the National Association of Home Builders/Wells Fargo Housing Market Index, fell to its lowest reading since December.

“Persistently high mortgage rates are keeping many prospective buyers on the sidelines,” Carl Harris, NAHB’s chair, said Wednesday. “Home builders are also dealing with higher rates for construction and development loans, chronic labor shortages and a dearth of buildable lots.”

Part of the stickiness of inflation is due to housing costs, which could be helped if rates were to go down, said Robert Dietz, NAHB’s chief economist.

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“The best way to bring down shelter inflation and push the overall inflation rate down to the 2 percent range is to increase the nation’s housing supply,” he said in a statement. “A more favorable interest rate environment for construction and development loans would help to achieve this aim.”

More builders are choosing to cut prices, which are at record highs, even though the average slashing of value of a home has stayed the same over the past year, NAHB said.

High mortgage rates may continue to keep buyers at bay if they remain above 7 percent, NerdWallet’s Holden Lewis said.

“Housing starts fell in May to their lowest level in almost five years,” he said in a note shared with Newsweek. “Builders find it difficult to build houses that homebuyers can afford with mortgage rates around 7 percent.”

For now, builders are seemingly waiting out the market. Lewis added: “While they wait for rates to fall, builders are holding back and applying for fewer construction permits. Homebuilding will rebound when mortgage rates fall to 6.5 percent or lower.”