Housing starts tumble

June 20, 2024

Housing starts, another name for new home construction, plunged 5.5% in May following a slight downward revision for April. Both single and multifamily starts were soft. All regions except the West reported declines. Compared to May of last year, starts are 19.3% lower, driven by a 52% deterioration in multifamily construction. Builders have been focusing more on single-family homes while they work through the multifamily backlogs. There were a record number of apartments in the works last summer with more expected to be completed this year.

Single-family starts fell 5.2% in May to the lowest level since October of 2023, slightly below one million units. Mortgage rates above 7% have taken a bite out of demand at a time when prices remain unaffordable for many buyers. At the start of June, rates fell below the 7% threshold; however, new mortgage application activity remains subdued. Many are holding out for even lower rates.

Multifamily starts of buildings with five units or more dropped 10.3% in May to below 300,000 units; starts peaked above 600,000 units back in 2022. Apartment completions are trending lower to about 479,000 units, while units under construction are down from their record high of one million units in 2023 to 898,000 units in May. Markets with the newest apartment supply have seen the greatest reprieve in rent costs, but significant underlying demand is putting a floor under how low rents can go.

Building permits, which lead construction activity, slumped 3.8% and are now 9.5% lower than a year ago. The silver lining is that single-family permits are still trending higher than a year ago. More construction is needed at a time of very limited housing supply. Multifamily permits are 31.4% lower than a year ago, which will boost rent growth next year.

Home builder sentiment deteriorated further in June after May’s sentiment turned negative. Sentiment is now at the lowest point for the year so far. The National Association of Home Builders, which tracks sentiment, reported that all components of the index struggled in June. Present sales, which have been trending positively for the past four months, turned negative, while traffic from prospective buyers came in at the lowest level since December 2023. High interest rates are hurting builders from both sides, as demand is restricted and financing costs turn higher. 

The traditionally busy home buying season is being dampened by the “higher for longer” interest rate environment. Builders are feeling the pinch, as many are still offering discounts and mortgage rate buydowns to lure sidelined buyers; that hurts their margins. Ramping up construction is hard to do at a time of labor, land and materials shortages. Total building permits are trending at the lowest level since early 2020, signaling a lackluster pipeline of housing. This is bad news for millennials, who are reaching their prime home buying years.