The housing market cools down, with US housing starts falling to a five-year low

Due to high inventory of homes pending sale in the market and persistently elevated mortgage interest rates, the willingness of US developers to build homes has been suppressed, with the pace of housing starts in May dropping to the lowest level since the early stages of the COVID-19 pandemic.

Data released by the US government on Wednesday (June 18) showed that the annualized total of housing starts in May fell sharply by 9.8% MoM to 1.256 million units, the lowest level since June 2020 and far below the market's prior expectation of 1.35 million units.

The data also revealed that the operating rate for multifamily housing starts declined by nearly 30% from the highest level since 2023. After downward revisions to last month's data, the operating rate for new single-family housing starts rose slightly to 924,000 units.

Building permits issued in May also dropped to 1.39 million units, marking the lowest level in five years. The pace of permits issued for single-family homes was the slowest since April 2023. Additionally, the inventory of completed homes has climbed to the highest level since 2009.

Media analysis suggests that the report indicates that US homebuilding activity remains sluggish amid multiple unfavourable factors. The prolonged rise in home prices, coupled with persistently high financing costs, is suppressing homebuying demand and forcing developers to increase promotional efforts.

According to data released earlier in the day by the Mortgage Bankers Association (MBA), the 30-year fixed mortgage rate was 6.84% last week.

Many economists expect that housing construction will struggle to contribute to US economic growth this year. Following the data release, the GDPNow model of the Federal Reserve Bank of Atlanta lowered its Q2 GDP growth forecast by 0.1 percentage point.

Due to unstable demand and potential cost increases from imported building materials due to Trump-era tariffs, builder confidence has fallen to the lowest level since 2022.

Meanwhile, the proportion of housing developers actively reducing prices in June rose to 37%, the highest level since the National Association of Home Builders (NAHB) began tracking this data in 2022.

The report also showed that the number of single-family homes under construction continued to decline, extending the downward trend from the peak in 2022.

Regionally, housing starts in the South, the largest homebuilding market in the US, fell by 10.5%, with similar declines observed in the Midwest. New construction projects in the Northeast plummeted, primarily due to a sharp drop in multifamily housing construction, while starts in the West rebounded.

Alex Barron, a housing market analyst at the Housing Research Center, pointed out that with significant promotional costs being invested to attract customers, the profits of housing developers are being eroded.

In addition to cutting prices, developers are also attracting buyers by offering "mortgage rate buyouts" — that is, subsidizing customers' mortgage interest rates. But even so, customers are still demanding larger subsidies.

Since peaking in 2022, US home prices have been on a slow decline. The NAHB expects the total number of new single-family home starts to decline this year, and developers are slowing down new projects, focusing primarily on destocking.