Home construction ‘plunge’ may not tell the whole story
Housing starts were way down in May but could just signal a correction after an unexpectedly strong early spring. Still, builder sentiment continues to slide.
The latest construction data paints a pretty bleak picture of the state of new housing — but it may be more of a correction than a trend following better-than-expected data from earlier this year.
All metrics declined in May: Overall housing starts were down a whopping 15.4% between April and May and down 8.7% compared to a year ago, according to the U.S. Census Bureau's June 16 report. Much of that drop came from the multifamily sector, however; single-family home starts were down just 1.9% from April to May and down 6.7% year-over-year.
Within the single-family sector, permits dropped 1.8% compared to a year ago, while the number of homes currently under construction fell 7.1% for the same period and completions declined by 16.8%.
But May's data is only a snapshot, meaning a June rebound is possible, according to Nancy Vanden Houten, lead economist at Oxford Economics.
"Just as the pace of housing starts in March and April overstated the strength in housing activity, the plunge in May overstates any weakness," Vanden Houten said.
Multifamily construction was particularly strong earlier this year, with apartment construction jumping 22.3% year-over-year in April and 13.5% in March.
New projects could pick up later in the year: Going forward, the pace of new home construction will likely depend on what's happening in the overall economy as the Middle East war potentially winds down.
"We expect starts to move sideways until later in the year when we expect lower mortgage rates in response to easing inflation and Fed rate cuts to spur both home sales and starts," Vanden Houten said.
"Homebuilders will need to work down some of their inventory of single-family homes — which account for more than two-thirds of starts — before they boost construction in a meaningful way."
Builder sentiment still in the doldrums: The sluggish state of construction appears to be reflected in the latest builder sentiment index, which fell two points in June to 35. It's the 14th consecutive month of sentiment readings below 40, a streak not seen since the Great Recession around 2011, according to the National Association of Home Builders.
NAHB's monthly survey found that 35% of builders cut prices in June, up from 32% in May, and the share of builders offering sales incentives also inched up slightly.
Builders in the West remained the least optimistic about the market, with an average index score of 27. The Northeast had the highest sentiment score at 44, followed by the Midwest (43) and South (33).