Home construction stalls as costs rise, demand softens
Housing starts and permits fell in May in response to economic and market factors, while buyers continue to hold out despite easing mortgage rates.
Key points:
- Single-family starts were down 7.3% compared to a year ago, while issued permits dropped 6.4%.
- Builders face a variety of headwinds, including higher material and financing costs, slowing demand, tariff uncertainty and competition in the resale market.
- Mortgage rates continue to drift downward, improving affordability for buyers in more balanced markets, but mortgage purchase applications are still falling.
Summer is usually the busy season for builders, but the latest construction numbers suggest there will be less hammering this year.
Housing starts and building permits slowed significantly in May, according to data released today by the U.S. Census Bureau. For single-family homes, starts were down 7.3% compared to a year ago, while permits were down 6.4% for the same period. Completions were up slightly at 0.1% year-over-year.
The slowdown became more significant recently, with overall housing starts — including apartments and condominiums — down 9.8% in May compared to April and at the lowest level since the early days of the pandemic.
Multiple headwinds for builders
The current macroeconomic environment, coupled with housing market shifts, appears to be taking a toll on the construction industry.
"Builders face higher financing costs, tariff uncertainty, softer demand from elevated rates, increased competition from rising existing-home inventory in key markets like Texas and Florida, and higher inventories of their own," said Odeta Kushi, deputy chief economist at First American. "This mix is weighing on builder sentiment."
That was reflected in the National Association of Home Builders' June survey, which found that builder confidence fell to its third-lowest level in 13 years. The NAHB report also noted that 37% of builders were cutting prices this month, the highest share since it began tracking price cuts in 2022.
"This underscores the effects of the current trade war on homebuilding augmented by worsening labor shortages and growing concern from builders about housing demand," said Danielle Hale, chief economist at Realtor.com.
Rates dip leading up to Fed announcement
Meanwhile, mortgage rates continued to drift downward ahead of the Federal Reserve's June 18 meeting. The 30-year fixed-rate averaged 6.81% this week, down from 6.84% the week before, according to the latest Freddie Mac survey. It is now slightly below levels seen a year ago, when it was at 6.87%.
The slow-and-steady decline in rates means affordability is improving slightly, which could set the stage for a busier summer market, said Hannah Jones, senior economic research analyst for Realtor.com.
"However, this shift is far from uniform across the country. In many Northeast and Midwest metros, limited supply and sustained buyer demand continue to create tight, competitive conditions, while many Southern metros see inventory levels far surpassing pre-pandemic norms, and falling home prices," Jones said.
Mortgage applications have slowed
Easing rates may not be enough to motivate buyers. Overall mortgage applications were down 2.6% this week, according to the Mortgage Bankers Association, and purchase applications fell 5% compared to the previous week.
"Even with lower average mortgage rates, applications declined over the week as ongoing economic uncertainty weighed on potential homebuyers' purchase decisions," said Joel Kan, MBA's deputy chief economist.