U.S. Housing Starts Plummet 15.4% in May, Missing Expectations

U.S. housing starts registered a sharp 15.4% decline in May, falling to an annualized rate of 1.177 million units. This figure significantly underperformed consensus expectations of 1.430 million and represents an 8.7% decrease compared to a year ago. The reduction in May was observed across both single-family and multi-unit dwelling constructions.

The decline was most pronounced in the multi-unit sector, which saw a 40.2% plunge in starts. This marks one of the largest monthly drops on record for multi-unit housing since data collection began in 1959. Conversely, single-family starts experienced a more modest 1.9% decrease and remain near their levels at the beginning of the year. Geographically, starts fell in the South, West, and Northeast, while the Midwest saw an increase. New building permits, a forward-looking indicator, also dipped slightly by 0.7% to a 1.413 million annual rate, narrowly missing the 1.418 million forecast. However, single-family permits increased by 0.6%, suggesting underlying stability in that segment.

Despite the notable monthly volatility often seen in housing start data, the May figures represent the slowest pace of construction since 2019, excluding the immediate impact of the COVID-19 pandemic. Home completions in May also decreased by 8.1% to a 1.313 million annual rate, with the multi-unit sector again leading this decline at 18.8%, compared to a 1.6% drop in single-family completions. This trend of completions outpacing new starts has led to a 7.1% reduction in the total number of homes under construction over the past year. While similar declines in homes under construction historically preceded housing market downturns in the early 1990s and mid-2000s, persistent underbuilding since 2007, with the exception of the pandemic period, may contribute to elevated home prices despite current headwinds.

The housing market continues to face a challenging environment, with affordability remaining a primary concern. The average 30-year mortgage rate recently climbed back to approximately 6.6%, nearly double the rates seen in much of 2021. Additional factors such as high home prices, restrictive local building regulations, and tariffs on construction materials further constrain builder activity. This challenging landscape is reflected in homebuilder sentiment, with the National Association of Home Builders (NAHB) index falling to 35 in June from 37 in May. A reading below 50 indicates that more builders view conditions as poor rather than good, marking the 26th consecutive month of such sentiment.

In other economic news, import prices rose by 1.9% in May, and export prices increased by 1.3%. On a year-over-year basis, import prices are up 6.7%, and export prices have climbed 11.2%. Anticipated declines in oil prices, following a recent international agreement, are expected to temper these price increases in the near future.

Key terms:

1. Housing Starts: A measure of the number of new residential construction projects on which ground has been broken during a given period.

2. Building Permits: Authorizations issued by local governments for the construction of new buildings or additions to existing ones, serving as an indicator of future construction activity.

3. Annualized Rate: A projection of a short-term data point (e.g., monthly) to a full-year figure by multiplying it by the number of periods in a year, allowing for comparison with annual data.