Housing Starts Drop in May as Builders Remain Wary of Elevated Interest Rates

An aerial view of homes in a housing development in Santa Clarita, Calif., on Sept. 8, 2023. Mario Tama/Getty Images

The construction of new residential housing units slowed last month, with homebuilders struggling amid an environment of high interest rates.

“Privately owned housing starts in May were at a seasonally adjusted annual rate of 1,277,000. This is 5.5 percent below the revised April estimate of 1,352,000 and is 19.3 percent below the May 2023 rate,” the U.S. Census Bureau said in a June 20 statement.

Housing starts are a key economic indicator measuring economic confidence.

The Midwest region experienced the largest decline in housing starts, where numbers slumped by 19 percent month over month. This was followed by the South with a decline of 8.5 percent, while the Northeast region fell by 2.5 percent. The West saw a 10.4 percent increase in housing starts.

Carl Harris, chairman of the National Association of Home Builders (NAHB), said that housing starts numbers were in line with their latest industry surveys.

The surveys “show builders are concerned with a high-interest environment that is making it harder to get acquisition, development, and construction loans to increase home building activity,” he said in a June 20 statement.

“Higher rates for builder and developer loans, along with ongoing supply-side challenges regarding construction labor and buildable lots, are acting as headwinds for new home and apartment construction.”

High mortgage rates are also keeping away potential buyers from the market, NAHB said.

According to Freddie Mac, the average weekly mortgage rate for a 30-year fixed-rate mortgage has dropped from 7.22 percent for the week ending May 1 to 6.87 percent for the week ending June 19.

Sam Khater, Freddie Mac’s chief economist, said in a statement that lowering mortgage rates and improving housing supply “bodes well for the housing market.”

Single‐family housing starts in May declined by 5.2 percent from April, the same report said.

The NAHB/Wells Fargo Housing Market Index (HMI) for newly built single-family homes went down by 2 points, to 43, in June, the lowest reading since December last year.

All three components of the index declined for the month, registering values below 50. The HMI index charting current sales conditions declined by 3 points to 48, sales expectations over the next six months fell by 4 points to 47, and a gauge measuring the traffic of prospective buyers decreased by 2 points to 28.

The HMI survey also revealed that 29 percent of builders cut home prices in June to boost sales.

Interest and Mortgage Rates

The direction of the federal funds rate is crucial in determining where mortgage rates are headed.

During the Federal Reserve’s policymaking meeting on June 12, the Federal Open Market Committee kept interest rates unchanged within a range of 5.25 percent to 5.5 percent. In addition, the agency now expects only a single rate cut this year.

The longer the federal fund rates remain elevated, so will mortgage rates, which can end up dampening demand in the housing market.

There is also a possibility that the Fed may raise interest rates higher, thus negatively affecting demand. Late last month, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said during a Barclay’s event in London that he wasn’t “ruling out potential interest-rate increases from here.”

While keeping interest rates at current levels is a more likely outcome, “if we get surprised by the data, then we would do what we need to do ... for the committee to get inflation all the way back down to our 2 percent,” he said.

According to real estate brokerage firm Redfin, home prices grew by only 0.3 percent month over month in May, the smallest increase since January last year.

Redfin economics research lead Chen Zhao pointed out that cooling inflation could lead to mortgage rates declining in late summer or early fall.

“A drop in mortgage rates would bring both buyers and sellers back to the market, which could either accelerate price growth or pull it back depending on who comes back with more force,“ he said in a June 18 statement. ”If sellers come back faster, prices would likely cool, but if buyers come back faster, prices would likely ramp up.”