U.S. Housing Starts Plummet 15.4% in May, Reaching multi-year Low

U.S. housing starts experienced a significant decline of 15.4% in May, falling to an annual rate of 1.177 million units. This figure dramatically missed economists' expectations of 1.430 million and represents the slowest pace of construction since 2019, excluding pandemic-related disruptions. The substantial drop raises questions about the health of the housing market, though analysts suggest a broader market collapse appears unlikely given underlying supply dynamics.

The decline in May was broad-based, affecting both single-family and multi-unit housing starts. Single-family starts saw a modest decrease of 1.9% for the month, while multi-unit starts, a more volatile component, plunged by a substantial 40.2%. On a year-over-year basis, overall housing starts are down 8.7%, with single-family starts falling 6.7% and multi-unit starts declining 14.2%. Geographically, starts fell in the South, West, and Northeast, but showed an increase in the Midwest.

New building permits, a forward-looking indicator of construction activity, also edged down by 0.7% in May to an annual rate of 1.413 million, slightly below the consensus expectation of 1.418 million. However, single-family permits showed a slight increase of 0.6%, suggesting some resilience in that segment. On an annual basis, single-family permits are down 1.8%, while multi-unit permits are up 2.5%. Separately, home completions decreased by 8.1% to a 1.313 million annual rate, again primarily driven by an 18.8% drop in the multi-family sector, compared to a 1.6% decline in single-family completions.

Despite the sharp monthly drop in starts, a full-blown housing bust, similar to those in the early 1990s or mid-2000s, is considered improbable. The U.S. has experienced a persistent underbuilding of homes since the 2007 financial crisis, suggesting that national average home prices could remain elevated. This is reinforced by the fact that home completions have generally outpaced starts over the past year, leading to a 7.1% reduction in homes under construction over the last twelve months—a trend that historically coincided with market downturns, but now occurs within a context of structural undersupply.

The homebuilding sector continues to grapple with a challenging environment marked by high home prices and elevated mortgage rates. While mortgage rates had seen a recent decline, they have since climbed back approximately 50 basis points to 6.6% following geopolitical events, roughly double the levels observed through much of 2021. Other persistent headwinds include restrictive local building regulations, labor shortages exacerbated by tighter immigration enforcement, and tariffs on building materials. These factors are reflected in homebuilder sentiment, with the National Association of Home Builders (NAHB) index falling to 35 in June from 37 in May, marking the 26th consecutive month where a majority of builders view conditions as unfavorable.

Key terms

1. Housing Starts: An economic indicator that measures the number of new residential construction projects on which ground has been broken during a given period. It reflects the health of the housing market and broader economic activity.

2. Building Permits: An authorization issued by a local government agency that must be obtained before construction or renovation of a building can begin. It serves as a leading indicator for future construction activity.

3. Annual Rate: A method of expressing a value or figure that occurs over a specific period (e.g., a month or quarter) as though it were occurring continuously over an entire year. This allows for easier comparison of data collected over different timeframes.