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

The Midwest region saw the biggest drop, with housing starts crashing by more than 19 percent in a single month.

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 declined last month, as homebuilders faced challenges from high interest rates.

"Privately owned housing starts in May reached a seasonally adjusted annual rate of 1,277,000. This marks a 5.5 percent decrease from the revised April estimate of 1,352,000 and a 19.3 percent drop from the May 2023 rate," the U.S. Census Bureau stated in a June 20 press release.

Housing starts serve as a critical economic indicator, reflecting the level of economic confidence.

The Midwest region saw the largest decline in housing starts, with numbers plummeting by 19 percent month over month. The South followed with an 8.5 percent decrease, and the Northeast fell by 2.5 percent. In contrast, the West experienced a 10.4 percent increase in housing starts.

Carl Harris, chairman of the National Association of Home Builders (NAHB), noted that these housing start figures align 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 stated in a June 20 press release.

“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 ended 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 5.2 percent from April, said the same report.

The NAHB/Wells Fargo Housing Market Index (HMI) for newly built single-family homes went down two points, to 43, in June. This is 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 three points to 48, sales expectations over the next six months fell four points to 47, and a gauge measuring the traffic of prospective buyers decreased two points to 28.

The HMI survey also revealed that 29 percent of builders reduced 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 policy-making meeting on June 12, the Federal Open Market Committee kept interest rates unchanged within a range of 5.25–5.5 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 was not “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 only grew by 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. If sellers come back faster, prices would likely cool, but if buyers come back faster, prices would likely ramp up,” he said in a June 18 statement.