Reflecting the drop in homebuilder confidence, housing starts were down 14.4% month over month in May, dropping to a seasonally adjusted annual rate of 1.549 million, according to a report released Thursday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development
The rate is 3.5% lower than the rate recorded this time a year ago.
While the multifamily sector had been showing strong growth, helping bolster the overall housing starts rate, it also dropped from a rate of 612,000 units in April to 496,000 in May. Single family housing starts also were down, dropping 9.2% month over month to a rate of 1.051 million units.
“The decline in housing starts mirrors the decline in homebuilder confidence,” said Odeta Kushi, First American’s deputy chief economist, according to a statement. “Homebuilder confidence dipped lower in May for the sixth month in a row. Homebuilding is a leading economic and housing indicator, and the decline in confidence suggests that housing is cooling.”
The number of building permits also dropped in May, with an overall annual rate of 1.695 million, a decrease of 7% from April. However, the rate is slightly higher (0.2%) than a year ago.
Experts believe the decline in the number of building permits issued is not a hopeful sign for a housing market still struggling with an inventory shortage.
“The number of dwellings under construction is at its highest level since the 1970s, partly because builders don’t get their hands on materials to complete homes,” said Holden Lewis, NerdWallet’s home and mortgage expert, according to a statement. “It looks like home builders may be pessimistic about the economy over the next year.”
In an additional sign of the slowing new construction market, the Mortgage Bankers Association (MBA) Builder Application Survey data for May show mortgage applications for new home purchases dropped 5% year over year and 4% month over month. The MBA estimates new single-family home sales were running at a seasonally adjusted annual rate of 727,000 units.
“Applications to purchase new homes in May fell by 4 percent from April, as mortgage rates hit 5.5 percent and further dampened demand. Activity was already constrained due to tight for-sale inventory, high sales prices, and extended building completion timelines,” said Joel Kan, the MBA’s associate vice president of economic and industry forecasting, in a statement. “After increasing for 15 consecutive months, the average loan size fell slightly from April’s survey high to $430,855, which is a potential indication that cooling demand may be starting to moderate price growth.”
But it’s not all bad news. Building completions are up 9.1% month over month and 9.3% from a year ago to a seasonally adjusted annual rate of 1.465 million, although experts say builders remain constrained by material and labor shortages.
“Supply and labor challenges continue to impact builders’ ability to complete projects in a timely fashion — both planned housing units authorized but not yet started and the number of units under construction are sitting at higher than normal levels,” said Dan Handy, Zillow’s economic analyst. “And despite a growing reserve of units under construction, the pace of completed houses increased after two months of declines, signaling the bottleneck of new homes in the funnel is finding its way to the market.”