Housing Starts Fall Short of Expectations

New home construction, or housing starts, grew 3.6% in May to a seasonally adjusted annual rate of 1.57 million, missing expectations. April figures were revised significantly lower. Both single- and multifamily starts rose in May as builders worked through a growing backlog of projects. Lumber prices and shortages of other materials climbed even higher in May, restraining activity for builders and remodelers. Lumber prices have come off the highs but remain 275% above pre-pandemic levels.

Single-family starts hit 1.1 million units in May, up 4.2%, as all regions but the Northeast posted gains. Persistently low mortgage rates are helping keep demand strong, especially for those looking to trade up. Many white-collar workers are still working from home and looking for more space. First-time buyers have been squeezed out of the housing market as supply at the lower end has been drying up. Shortages of appliances, building materials and furniture are motivating homeowners to switch their focus from their homes toward travel.

Multifamily projects for five units or more grew 4% to 465,000 units, with the South and West leading the gains. Multifamily building has remained strong, especially in suburban and exurban markets, as not all of those who fled the cities during the pandemic could afford to become new homeowners. According to a recent National Association of Realtors report, there is a deficit of about 3.5 million buildings with two or more units to match the pace of demand. Short supply of available rentals has driven prices higher, especially for lower income households. The federal eviction moratorium expires at the end of June; up to seven million people may be in danger of eviction because they are behind on rent payments. Rental relief provided to states in the last federal aid bill is barely trickling through to landlords and renters.

Building permits disappointed in May, falling 3% to a rate of 1.68 million, a seven-month low. Both single and multifamily permits dropped. The backlog of homes authorized but not yet started on construction hit a record high, while the backlog of single-family homes hit a 15-year high.

Builder sentiment dropped to the lowest level in 10 months but remains higher than pre-pandemic levels. Builders cite the high costs and short supply of materials, land and workers as their main concerns. Lumber prices have begun to come off record highs, which helps relieve some of the pressure.

Bottom Line
Low mortgage rates and strong demand for housing will help put a floor under the housing market during the summer months. Some of that demand is starting to cool as some buyers who are priced out switch their focus to activities such as travel. Builders will continue to face worker and material shortages in the upcoming months but may see a reprieve as the year progresses.

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