U.S. housing starts and permits plunged in May amid a steep rise in mortgage rates and sour builder sentiment.
We expect new housing supply to fall further as mortgage rates continue to rise following the Federal Reserve’s 75 basis-point rate increase on Wednesday, its largest since 1994.
Housing starts fell by 14.4% to 1.549 million on an annualized basis in May, the lowest point in more than a year, according to Commerce Department data released Thursday.
That was also lower than our estimate of about 1.66 million new houses needed each year to maintain a stable housing market in the long run. April’s reading was revised upwardly to 1.81 million.
The decline came from both single-family and multi-family categories, which were down by 9.2% and 23.7%, respectively.
This drop was not a good sign for new buyers because the housing market is still more than 3 million homes short of overall demand because of underbuilding in recent years. Fewer homes for sale will only add upward pressure on inflation, which is being driven higher in part by housing costs.
Building permits, a proxy for future housing starts, dropped by 7% in May, following a 3.2% decline in April. Because most permits become starts within two months, we should expect housing starts to decline further.
The number of completions increased by 9.1% on the month after declining for two months in a row since March.
Despite that, completions have remained relatively flat since last year as labor and material shortages have hampered construction, and builder sentiment was the lowest since July 2020, the data showed.
As mortgage rates have increased, housing demand has cooled off significantly since the start of the year. While prices continue to rise, we expect lower demand to temper price increases in the second half of the year. Builders, facing lower price growth, higher building material costs and labor shortages, will continue to slow down supply further to protect their profit margins.