U.S. Homebuilding Slumps to Six-Year Low as High Mortgage Rates and Costs Weigh on Housing Market

BY MIRABEL ODETA

U.S. homebuilding weakened sharply in May, with single-family construction falling to its lowest level in eight months as elevated mortgage rates, expensive building materials, and ongoing supply challenges continued to pressure the housing market.

The decline in single-family housing, combined with a steep drop in apartment construction, pushed overall housing starts to their weakest level in six years. The latest data from the Commerce Department showed that builders are struggling to increase supply despite a nationwide housing shortage that has contributed to an affordability crisis.

Residential investment, which includes home construction and related activity, has now declined for five consecutive quarters, adding to concerns that the housing sector could remain a drag on economic growth during the second quarter.

A recent survey from the National Association of Home Builders showed builder confidence weakened in June, reflecting concerns about borrowing costs, buyer demand, and elevated inventories of newly built homes.

“There is little indication that U.S. home building will break to the upside anytime soon,” said Sal Guatieri, a senior economist at BMO Capital Markets, pointing to high mortgage rates, previous overbuilding in parts of the South, and weaker builder activity.

Single-family housing starts, which represent the largest share of residential construction, dropped 1.9% in May to a seasonally adjusted annual rate of 882,000 units. That was the lowest level since September and marked a 6.7% decline compared with the same month a year earlier.

Construction activity declined in the South and West, two major housing markets, while the Northeast and Midwest recorded increases.

Mortgage rates have remained a major obstacle for potential buyers and builders. Higher energy prices and inflation concerns pushed Treasury yields higher, contributing to increased borrowing costs. The average rate on a popular 30-year fixed mortgage has climbed more than 50 basis points since the start of the conflict involving Iran and rising oil prices.

Before those pressures emerged, the housing market was already dealing with higher construction costs linked to tariffs that increased the price of imported materials, appliances, and other supplies needed for new homes.

Despite the decline in construction activity, permits for future single-family homebuilding increased slightly in May. Single-family permits rose 0.6% to an annual rate of 886,000 units, although they remained 1.8% below year-earlier levels.

The multi-family housing sector experienced a much sharper downturn. Starts for projects with five or more units dropped 41.6% in May to an annual rate of 284,000 units, reflecting weaker demand and uncertainty in the apartment market.

Overall housing starts fell 15.4% to a pace of 1.177 million units in May and were down 8.7% compared with a year earlier. Total building permits also declined, slipping 0.7% to an annual rate of 1.413 million units.

Some economists said the slowdown could help stabilize the market by preventing an excessive buildup of unsold homes. With demand weakened by high borrowing costs, builders have been cautious about adding more supply.

“This pullback should help to prevent an undesired backup in the inventory of new homes,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.

The housing data came alongside new figures showing continued inflation pressure from imported goods. Import prices increased more than expected in May, driven largely by higher fuel and capital goods costs.

Import prices rose 1.9% during the month after a revised 2.0% increase in April. Over the past year, import prices climbed 6.7%, marking the largest annual increase since August 2022.

Imported fuel prices jumped 12.5% in May following an 18.6% increase in April, while capital goods prices rose 1.3%. Strong demand related to artificial intelligence investment has contributed to higher prices for certain imported equipment and technology products.

Consumer inflation also accelerated in May at its fastest pace in three years, while producer prices recorded their largest increase in three and a half years. However, falling oil prices after diplomatic developments involving the U.S. and Iran raised hopes that some inflation pressures may begin to ease.

The Federal Reserve is closely monitoring these developments as officials consider the future path of interest rates. While inflation remains a concern, economists believe the threshold for another rate increase is high, especially if energy prices continue declining.

The central bank is expected to keep its benchmark interest rate unchanged within the 3.50% to 3.75% range while officials assess inflation trends, economic growth, and labor market conditions.

Beyond energy costs, imported food prices declined slightly in May, while prices for consumer goods excluding automobiles increased 0.5%. Imported vehicle prices, including parts and engines, also rebounded by 0.3%.

The combination of weaker housing activity and continued inflation pressures highlights the challenges facing the U.S. economy as businesses, consumers, and policymakers navigate high borrowing costs and shifting market conditions.