New construction slows in May as builder confidence drops due to high interest rates, impacting housing starts and market inventory.
In May, the issuance of building permits dropped to 1,386,000 (SAAR), marking a 3.8% decline from April and a 9.5% decrease compared to last year. Housing starts also saw a decline, falling to 1,277,000 (SAAR), which is 5.5% lower than April’s revised numbers and 19.3% less than a year ago. Specifically, single-family housing starts decreased to 982,000 (SAAR), down 5.2% from April and 1.7% below last May’s figures.
Key Factors: The decrease in new construction can be attributed to several factors. With an increasing number of homes being completed and uncertainty surrounding future interest rates, builder confidence has waned. As a result, many builders have reduced the initiation of new projects. Single-family housing starts have fallen 1.7% compared to last year, and construction of buildings with five or more units has plummeted by nearly 51.7%. This significant drop is partly due to the surplus of apartment buildings already completed and a slowdown in rent growth.
Market Implications: This slowdown in new construction suggests that builders are adopting a more cautious approach, influenced by high interest rates and reduced housing demand. According to Zillow, the median time a home stays on the market before going under contract remains at 13 days, the same as last month. Despite fast sales for well-priced homes, the overall inventory of homes for sale has increased by 22% compared to last year.
The housing market continues to grow as builders add new homes to the inventory. In May, single-family home completions were still about 1% higher than the previous year. However, with more homes entering the market and no corresponding increase in sales, the total inventory of homes for sale is higher than it was a year ago.
In response to these conditions, 29% of builders reduced prices last month, up from 25% in the previous month, according to the National Association of Home Builders. High mortgage rates are prompting builders to offer more incentives to attract buyers. Despite these incentives, the average price cut by builders remains steady at 6%.
The slowdown in new construction continues to shape the dynamics of the housing market, reflecting cautious builder sentiment and the ongoing impact of high interest rates.
Thanks for reading,
Chris
