One month after the biggest surge in housing starts in the last couple years, new constructions fell sharply, disappointing analysts and blunting hopes of a long-term rally by builders.
Starts fell 8% in June, after rising over 21% in May, with new permits down 3.7% as the housing industry continues to see-saw through a shaky pandemic recovery period.
“Housing starts posted a monthly decline in June as tightening monetary policy helped push mortgage rates up more than a quarter-point over the past month,” said Alicia Huey, chairman of the National Association of Home Builders (NAHB).
With inventory shortages affecting nearly every major market across the country, many economists have hoped new constructions could fill that void—at least partially. And though new builds have overall trended up this year, this latest report is not an encouraging sign for the short- and medium-term outlook of housing supply.
“New housing construction is the white knight riding in to save the housing market from the scourge of low inventory,” quipped Dr. Lisa Sturtevant, Bright MLS chief economist. “But even with new single-family starts increasing strongly since last fall, the number of new homes being built will not solve the near-term housing supply problem.”
Existing-home sales, which have been stunted by the so-called “golden handcuffs” effect of homeowners hesitant to give up low mortgage rates, make up a majority of sales. New homes are also historically more expensive, making them less ideal in a market where affordability is also a major concern.
But new builds are actually becoming cheaper, and though this month’s data does not foreshadow swift relief, a stable, growing supply of new builds remains a positive foundation for the industry beyond 2023.
“The recovery in the homebuilding industry and the delivery of more new homes is essential for meeting the nation’s housing needs and easing housing affordability challenges for prospective homebuyers,” Sturtevant said.
The numbers
The decrease in starts for single-family homes was actually slightly lower than the overall drop, at 7%. Permits for single-family homes rose slightly, 2.2%.
Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis, said in a statement that this datapoint indicates builder optimism remains resilient.
“While builders have slowed construction activity as interest rates have approached 7%, we anticipate mortgage rates will stabilize later this year in anticipation of the end of the Federal Reserve’s tightening cycle,” she said. “Single-family permits registered their highest pace since June 2022.”
It was the multifamily sector, which maintained growth through most of 2022 despite rising rates and costs, that saw bigger decreases this month. Multifamily stars fell 11.6% overall, and permits sank 13.5% (both for five-unit or more buildings).
Regionally, the Midwest saw the biggest drop (after experiencing the largest gains during the previous month), with starts down 33.1%. The South, which also saw an outsized surge in starts back in May, was down a more modest 4.4%—but with single-family starts falling further at 7.3%.
All four census regions saw decreases in both overall starts and single-family starts, except for the West, which tracked a 4.6% increase in single-family constructions (though still down 1.2% overall).
Permits were also down across regions and housing types except for the West and Northeast, where single-family permits came in flat. The Northeast saw the biggest drop in new permits overall, falling 23.4%.
