In May, the pace of homebuilding in the United States decelerated sharply, highlighting ongoing challenges in the housing market. According to data released by the Census Bureau on Thursday, the seasonally adjusted annual rate of new home construction dropped to 1.28 million units, down from April’s 1.35 million and significantly below economists’ expectations of 1.38 million. This marks the slowest pace of homebuilding since June 2020.
Building permits, a key indicator of future construction activity, also declined to an annual rate of 1.39 million units in May, falling short of April’s 1.44 million and missing the forecasted 1.45 million.
The persistently high demand for housing, exacerbated by a persistent shortage of existing homes on the market, has driven home prices to record highs. However, these elevated prices, coupled with soaring mortgage rates, have increasingly put homeownership out of reach for many prospective buyers.
Wells Fargo economists Sam Bullard and Patrick Barley noted, “The scarcity of existing homes on the market should benefit new construction, though affordability remains a substantial challenge for many homebuyers, particularly those purchasing for the first time.”
The sentiment among homebuilders reflects these challenges. The National Association of Home Builders/Wells Fargo Housing Market Index, a gauge of builder confidence, fell to its lowest level since December 2023 in June. At a reading of 43, the index remains below the critical threshold of 50, indicating that more builders view market conditions unfavorably.
Robert Frick, corporate economist at Navy Federal Credit Union, remarked, “Builders are in an ‘if you build them, they won’t come’ market, as continued high mortgage rates keep more potential buyers out of the market.”
Looking ahead, there is cautious optimism that relief may come from potential Federal Reserve actions. Mortgage rates have shown a slight decline recently, with the average rate for a 30-year mortgage standing at 6.87% this week, albeit still well above historical lows. Analysts suggest that if inflation continues to stabilize, the Fed might consider lowering its key interest rates later in the year, which could ease borrowing costs and stimulate housing market activity.
Sal Guatieri, senior economist at BMO, highlighted, “US home builders won’t become busier until borrowing costs fall. Thankfully, this is one more report pushing the needle toward a Fed rate cut later this year.”
The housing market’s trajectory hinges on these potential rate adjustments and broader economic conditions, as stakeholders navigate challenges posed by affordability constraints and market uncertainties.
