The construction of new homes in the United States took a hit in May, falling below expectations as builders responded to high interest rates by scaling back residential projects. This trend is raising concerns about already high housing prices.
According to government data released on Thursday, new-home construction dropped 5.5 percent last month to an annualized rate of 1.28 million. This decline was driven by slower construction of both single-family and multifamily homes, with building permits also decreasing by 3.8 percent.
The recent decrease in construction activity is a direct result of the record-high average rate on 30-year mortgages, currently at 6.87 percent. This has weakened housing demand and increased costs for builders, leading to their reluctance to start new projects.
As Daniel Vielhaber, an economist at Nationwide, points out, the drop in builder sentiment and construction activity suggests continued challenges in the housing market in the coming months.
The slowdown in construction is further exacerbating the strain on prospective home buyers, as there is a growing imbalance between supply and demand.
Chen Zhao of Redfin emphasizes the crucial need for more building to increase housing supply and stabilize prices. However, with construction activity on the decline, consumers are unlikely to see significant drops in home prices in the near future.
The uncertainty surrounding interest rates and the Federal Reserve’s future decisions are also impacting builders’ decisions, as lower rates could potentially stimulate housing demand.
The current mortgage rate of 6.87 percent is a stark contrast to the 3 percent rate seen in June 2021, highlighting the impact of the Fed’s efforts to combat inflation.
First-time home buyers are facing multiple challenges, including high prices, interest rates, and low inventory, creating a difficult market for them to navigate. Existing homeowners with lower mortgage rates are feeling locked in, limiting housing mobility and availability.
The reduced rate of construction is expected to worsen these inventory constraints, potentially driving prices even higher and putting further strain on consumers.
As Ms. Fonseca warns, the lack of new construction could lead to increased price burdens for buyers in the future.
