Housing Starts Rise 0.4% Despite 2.7% Drop in Permits

In May, the United States witnessed an increase in the number of single-family homes started, while building permits saw a sharp decline. The seasonally adjusted annual rate of single-family housing starts rose to 924,000 units, marking a 0.4% increase from the previous month. This uptick in housing starts suggests a continued demand for new homes, potentially driven by factors such as low mortgage rates and a growing population.

However, the significant drop in building permits, which fell by 2.7% to an annual rate of 898,000 units, indicates that developers may be facing challenges that are hindering their ability to secure permits for new projects. These challenges could include supply chain disruptions, labor shortages, or regulatory hurdles. The decline in building permits suggests a cautious approach by developers, who may be uncertain about the future demand for new homes or the economic outlook.

The increase in housing starts, despite the decline in building permits, highlights the complex interplay of factors influencing the construction sector. The rise in housing starts could be attributed to the backlog of projects that were delayed due to the pandemic or other factors. However, the decline in building permits suggests that developers may be facing challenges that are hindering their ability to secure permits for new projects.

The impact of tariffs on construction costs is also a significant factor influencing the housing market. The tariffs imposed by the Trump administration on imported goods, including lumber, aluminum, and steel, have increased the cost of construction materials. This has made it more difficult for developers to secure permits for new projects, as the increased cost of construction materials has made it more challenging to obtain financing for new projects.

The economic uncertainty caused by the tariffs has also led to a pause in the rate-cutting cycle by the Federal Reserve. The Federal Reserve is expected to maintain the benchmark overnight interest rate in the range of 4.25% to 4.50%, which has remained unchanged since December 2023. The increase in borrowing costs has made it more difficult for potential homebuyers to afford new homes, leading to an increase in the supply of new single-family homes on the market.

The National Association of Home Builders reported that builder confidence in the single-family housing market fell to its lowest level in two and a half years in June. The association also reported that the proportion of builders who are reducing prices to attract buyers has increased, and that they expect single-family housing starts to decline in 2024. This suggests that the housing market may be facing challenges that are hindering its ability to recover from the pandemic.

Residential investment, which includes housing construction, experienced a significant decline in the first two years of the pandemic due to the surge in mortgage rates. However, it rebounded in 2024 and saw a slight contraction in the first quarter of this year. This suggests that the housing market may be facing challenges that are hindering its ability to recover from the pandemic.

Economists have expressed concerns about the potential impact of the decline in building permits on the broader economy. The chief U.S. economist at Santander Capital Markets noted that real economic activity in the current quarter appears to be declining significantly, and that the summer months may see further weakness. This suggests that the housing market may be facing challenges that are hindering its ability to recover from the pandemic, and that the broader economy may be at risk of a slowdown.