New home construction surges in May could cool housing inflation
New home construction soared past expectations last month amid ongoing inventory challenges in the resale market.
High mortgage rates, fueled by the Federal Reserve’s interest rate hikes, are drastically reducing already limited housing stock as potential sellers are choosing to stay put instead of risking a higher rate on a new purchase.
But builders are filling the inventory gap in single-family and multifamily construction for those who can still afford to buy, even as younger or first-time buyers are pushed toward rentals.
Housing starts surge past projections
New construction surged by 21.7 percent on an unadjusted basis in May, sailing past economists’ projections that there would be a small decline.
Housing starts increased to an annual rate of 1.63 million units last month, up from 1.34 million in April, according to Census Bureau data released Tuesday. Single-family and multifamily construction experienced monthly increases.
Single-family starts jumped by 18.5 percent over revised April figures to a rate of 997,000 units, while starts for buildings with five or more units was 624,000.
What’s next: Is housing about to get more affordable after paused Fed rate hikes?
“The single-family housing starts of one million were very rare in the 10 years prior to the pandemic,” Lawrence Yun, chief economist at the National Association of Realtors (NAR) told The Hill in an email. “Therefore, the latest figure of one million reflects the builders’ confidence in making a relatively easy sale when inventory is offered to consumers.”
“Existing home listings are hampered by homeowners unwilling to give up their locked-in low mortgage rates, but home builders have no constraints. Essentially, build it and home buyers will show,” Yun said.
Builder confidence up after Fed rate pause
Homebuilder confidence in the market for newly built single-family homes reached its highest level in nearly a year in June, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index released this week.
The index has now increased for six straight months, and NAHB Chief Economist Robert Dietz said homebuilder sentiment is rising as a “bottom is forming for single-family home building.”
“The Federal Reserve nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans,” Dietz said.
“Shelter cost growth is now the leading source of inflation, and such costs can only be tamed by building more affordable, attainable housing, for sale, for rent, multifamily and single family,” he added.
How Fed rate hikes impacted builders
Consumer prices rose 0.1 percent last month and are up 4 percent since last year, according to the consumer price index (CPI) released last week.
But the cost of housing increased by 0.6 percent from April, making it the largest factor in the monthly increase in inflation. Prices are now 8 percent higher than they were a year ago on an unadjusted basis.
Dietz added following the release of housing starts data on Tuesday that the figures are good news for the inflation outlook given that the influx in units could cool the housing element of the CPI.
The Federal Reserve interest rate hikes over the past year and a half were meant to cool inflation-impacted builders by increasing borrowing costs.
But George Ratiu, chief economist for Keeping Current Matters, told The Hill that builders lately have been buoyed by strong demand.
“Do builders worry about the economic and financial outlook enough to restrain by choice, the volume that they can build, or are they encouraged by a still resilient economy and strong demand from buyers?” Ratiu said.
“I do still see value in the single-family space, in part because this is what most Americans really want. So the bottom line is the Fed impacting new home construction? Yes, through borrowing costs. But at the same time market dynamics — supply and demand — remain very favorable for home builders,” he added.
Low inventory and high prices are pushing potential buyers to rent
Still, high mortgage rates, persistently elevated housing costs, and lack of availability have severely hampered buyers in the last year and at times, pushed them back into the costly rental market.
This is especially true for prospective buyers looking to secure the purchase of their first home.
Data from the NAR released earlier this month shows the U.S. housing market is missing close to 320,000 homes affordable for middle-income buyers earning up to $75,000 annually.
Middle-income buyers in the current market can afford fewer than a quarter of homes listed for sale.
“The multifamily starts of 634,000 are the highest in 37 years and reflect the ongoing strength in rent growth,” NAR’s Yun added.
“Some developers may be viewing that homeownership will be out of reach for many people for a while and that they will need to keep renting,” he said.
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