Construction Slowdown Impacts US Housing Market

Construction of new homes in the United States dropped below expectations in May as builders pull back on new residential projects largely in response to high interest rates, reinforcing concerns about stubbornly high housing prices.

Decline in Housing Starts

Government data released on Thursday showed that new-home construction, or housing starts, fell 5.5 percent last month to an annualized rate of 1.28 million, a sign of more cracks in the already shaky housing market. Slower construction of both single-family and multifamily homes contributed to the overall drop. Building permits dipped 3.8 percent, pointing to less future construction.

Impact of High Interest Rates

This downturn in home building comes as the average rate on 30-year mortgages, the nation’s most popular home loan, has reached highs not seen in decades, though the rate dipped slightly this week to 6.87 percent, Freddie Mac reported on Thursday. The magnitude of the decrease in construction last month underscores that high interest rates are both weakening housing demand and raising costs for builders.

Builders’ Reluctance and Market Sentiment

Home builder sentiment dropped in May to its lowest level this year before falling even further this month, suggesting relatively tepid home construction data in the coming months, Daniel Vielhaber, an economist at Nationwide, said in a statement. The weakening in construction is putting strain on prospective home buyers as builders are reluctant to start new projects due to the current market conditions.

Impact on Housing Supply and Prices

The latest housing construction data, released by the U.S. Census Bureau and the Department of Housing and Urban Development, reinforces that consumers are unlikely to see home prices drop significantly over the next couple of years. The data suggests a tighter housing supply in the near future, which could keep home price growth high and impact affordability for buyers.