US housing starts decline to lowest level in more than a year

New US home construction dropped in May, highlighting the impact of ongoing supply chain challenges and sinking sales as mortgage rates rise. 

Residential starts declined 14.4 per cent last month to a 1.55 million annualised rate, the lowest in more than a year, government data released on Thursday (Jun 16) showed. The median forecast called for a 1.69 million pace. April construction was revised sharply higher to a 1.81 million rate, which was the strongest since 2006.

Applications to build, a proxy for future construction, fell to an annualised 1.7 million units, the lowest since September.

The monthly decline in starts was the largest since April 2020, and suggests residential construction is coming under pressure as higher mortgage rates take an even bigger toll on demand. Still, with the pace of building permits exceeding starts, homebuilding in the near term may hold up.

The figures come after the Federal Reserve raised its benchmark rate by 75 basis points (bps) in a meeting on Wednesday, and held out the possibility of another such move next month to curb decades-high inflation. Prior to the Fed decision, mortgage rates were hovering above 5.6 per cent, well above the 3.5 per cent at the beginning of this year and the highest since 2008. 

The government’s report showed single-family housing starts declined 9.2 per cent to an annualised 1.05 million rate, the slowest since 2020. Construction of multifamily dwellings plunged 23.7 per cent to a 498,000 rate, the weakest since November. 

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Still, builder backlogs remain elevated. The number of total homes authorised for construction but not yet started rose 0.7 per cent in May. The number of single-family properties under construction was unchanged from a month earlier at the highest level since 2006. 

At the conclusion of the Fed’s policy meeting, chair Jerome Powell indicated home prices may be slow to cool given the limited number of properties on the market.

“There’s a tremendous amount of supply in the housing market of unfinished homes, whereas the inventory of finished homes for sale is incredibly low, historically low, so it’s still a very tight market,” Powell said at a press conference. “Prices might keep going up for a while even in a world where rates are up.”

A separate report on Wednesday showed that US homebuilder sentiment slid to a 2-year low in June as rising inflation and higher mortgage rates weighed on demand. May data on new and existing home sales will be released next week. 

The housing starts data are subject to large revisions; the report showed 90 per cent confidence that the change in May starts ranged from declines of 5.5 per cent to 23.3 per cent. Bloomberg