By Michael Sasso | Bloomberg
New residential construction in the US slowed to the weakest pace in six years, driven by a steep decline in apartment projects.
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Housing starts decreased 15.4% in May to an annualized rate of 1.18 million, federal data released Tuesday showed. That trailed all estimates of economists surveyed by Bloomberg.
That decline was led by a 40.2% plunge in multifamily starts. Starts of single-family homes also fell, by 1.9%, to an annualized 882,000 houses.
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Tuesday’s report shows contractors are still showing restraint as they work down the supply of new homes for sale amid sluggish demand. Many have cut prices and subsidized customers’ mortgage rates to find buyers, while builders also have slowed production of “spec homes,” which are houses built without a signed contract in hand.
Economists attributed some of the sharp drop in apartment buildings to choppiness in the figures.
In a note Tuesday, Samuel Tombs, chief US economist at Pantheon Macroeconomics, called May’s construction decline “unalarming” since monthly starts are volatile, especially for multifamily data. However, the longer-term housing outlook is still weak, he said.
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“A recovery in homebuilding remains a long way off,” Tombs said. “Mortgage rates remain too high for many people to consider purchasing their first home, and hopes of the FOMC being able to ease policy this year have dimmed,” refering to the Federal Open Market Committee, the Federal Reserve’s rate-setting body.
Total building permits, which point to future construction, fell 0.7% in May to an annualized rate of 1.41 million. Permits for one-family homes rose slightly.
“We’re more surprised by the concentrated decline in multifamily construction than by the headline figure,” said Stuart Paul, an economist with Bloomberg. “With homeownership far out of reach for the median prospective buyer, we expect single-family starts to be under persistent pressure. But we think the decline in multifamily construction will prove temporary as builders refocus on bringing smaller, more affordable units and rentals to market.”
President Donald Trump has tried to prod builders to increase home production, hoping to improve affordability ahead of the midterm congressional elections. The president has taken to social media to blast homebuilders for “sitting on 2 million empty lots” and proposed banning institutional investors from buying single-family rental homes. Legislation that would curb investor home purchases, although weakened from its original form, is pending before Congress.
All regions saw a drop in construction, except the Midwest. In the South, the biggest homebuilding region, starts fell to the lowest since May 2020, driven by a sharp decline in apartment buildings.
The new residential construction data are volatile, and the government report showed 90% confidence that the monthly change ranged from a 25.2% drop to a 5.6% decline.
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The National Association of Realtors will provide a look at the home resale market on Wednesday with its release of the pending home sales report for May.
Homebuilder sentiment falls
Confidence among homebuilders slipped in June, dragged down by rising mortgage rates and materials costs, as well as a sharp drop in sentiment across the South.
An index of overall market conditions from the National Association of Home Builders and Wells Fargo fell 2 points to 35 this month, according to data released Monday, lower than the 37 anticipated by economists in a Bloomberg survey. The South, the nation’s largest homebuilding region, saw its biggest decline since November 2023.
A reading below 50 means more builders see conditions as poor than good. June’s level marks the 14th straight month sentiment was below 40, the longest such streak since 2011-2012, NAHB said.
Among the index’s components, a gauge of present sales fell 2 points to 38, while measures of future sales and prospective buyer traffic were unchanged, NAHB’s data show.
The homebuilders association partly blamed the drop in the overall index on rising materials prices, financing costs and regulations that are impeding home construction.
“With the nation short about 1.2 million homes, builder sentiment will remain soft until barriers are eased and conditions improve for home building,” NAHB Chairman Bill Owens, an Ohio builder, said in a release.
The spring selling season — when home sales reach their annual peaks — has been disappointing so far for publicly traded homebuilders, with soft demand leaving many with a backlog of orders not yet delivered to customers that is well short of last year’s levels, Bloomberg Intelligence analyst Drew Reading said in a note last week.
This month, 35% of builders reported lowering prices, compared with 32% in May. Meantime, 62% said they’re using sales incentives, compared with 61% in May, marking the 15th consecutive month that at least 60% have used them.
Outside of the South, sentiment in the Northeast rose to the highest level since October, while sentiment was flat in the West and Midwest.
The federal government will give an update on May housing starts on Tuesday with its residential construction report.
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