New Home Construction Slows as Mortgage Rates Remain High

New Home Construction Slows as Mortgage Rates Remain High

New home construction in the United States fell short of expectations in May as builders pulled back on new housing projects, largely in response to high interest rates, adding to concerns about persistently high home prices.

Government data released on Thursday showed that new home construction or housing starts fell 5.5 percent last month to an annual rate of 1.28 million, a sign of further cracks in the already shaky housing market. Slower construction of single-family and multi-family homes contributed to the overall decline. The number of building permits fell by 3.8 percent, suggesting that less construction will take place in the future.

This decline in housing construction comes as the average interest rate on 30-year mortgages, the country’s most popular mortgage, has reached a high not seen in decades, although the rate fell slightly this week to 6.87 percent , Freddie Mac reported Thursday.

The magnitude of the contraction in construction last month underscores that high interest rates are both weakening demand for housing and increasing costs for builders – two dynamics that ultimately contribute to builders’ reluctance to undertake projects. Sentiment among homebuilders fell to its lowest level this year in May before falling even further this month, suggesting that homebuilding data will be relatively subdued in the coming months, Nationwide economist Daniel Vielhaber said. in a statement.

The slowdown in the construction industry, in turn, is only putting more pressure on potential homebuyers.

“If you’re a consumer, if you’re someone who wants to buy a home, you ultimately want a much larger supply,” said Chen Zhao, who leads the housing team at real estate services company Redfin. “The key to more housing is that we need more buildings. So if we see less being built, that’s bad news.”

The latest housing construction data released by the US Census Bureau and the Department of Housing and Urban Development reinforces that consumer prices are unlikely to fall significantly in the next few years, Ms. Zhao said. The data point, she added, represents “another factor that would keep house price growth high” as it points to tighter housing supply over the next year or two.

Federal Reserve officials left interest rates unchanged at their meeting last week and predicted they would cut borrowing costs just once by the end of 2024. Homebuilders are likely reacting to uncertainty over the Fed’s upcoming interest rate decisions – and how lower interest rates could affect housing demand, Ms Zhao said.

“What the Fed is going to do is very important to many different players in the economy, including construction companies,” said Julia Fonseca, an assistant professor of finance at the University of Illinois at Urbana-Champaign.

Mortgage rates were around 3 percent in June 2021, less than half of current levels. They began rising in 2022 when the Fed began raising its key interest rate to combat inflation.

First-time home buyers in particular are being “pressured from all sides” as they face high prices, high interest rates and low inventory, Ms Fonseca said. Many homeowners with mortgage rates significantly below current rates feel trapped, limiting their mobility and limiting the supply of housing on the market.

Lower construction rates are likely to add to these existing pressures on housing stock and potentially increase price burdens for consumers.

“If new construction doesn’t happen, that could push prices even higher,” Ms. Fonseca said.

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2024-06-20 18:48:28