Housing Market Takes A Hit With Starts At Lowest Since Pandemic, High Rates Discourage Builders And Buyers

New data from the U.S. Census Bureau shows that housing starts have sunk to their lowest point since the early days of the pandemic in 2020, recording a 19% drop compared to last year.

With the Federal Reserve maintaining high interest rates to tackle stubborn inflation, the downturn in the housing market is intensifying, impacting both builders and prospective homeowners. Contrary to economists’ expectations of a rise to an annual rate of 1.37 million, housing starts fell 5.5% from April to a seasonally adjusted rate of 1.277 million, indicating mounting supply chain challenges and an escalating affordability crisis as the Fed signals sustained high interest rates.

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The downward trend in housing starts is primarily due to a reduction in multifamily projects, according to National Association of Home Builders (NAHB) chief economist Robert Dietz, which has been hit hardest by high interest rates.

"It is not just the single-family market that is experiencing challenges. The three-month moving average for multifamily starts is the lowest since the fall of 2013 as the multifamily development deceleration continues," Dietz said in a news release.

As potential homebuyers contend with high costs due (in part) to the shortage, some builders are opting to cut prices to stimulate demand in a market that remains out of reach for many due to the high cost of financing. The average price cuts on homes, however, have not increased, indicating that the market may not yet have reached its lowest point.

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"Overall lower housing production corresponds with our latest industry surveys, which 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," NAHB chairman Carl Harris said in the news 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."

In May, the ratio of multifamily completions to starts — the number of apartment units finished compared to those that began construction — came in at 1.8. "This ratio was 0.6 in April 2022 when many more apartments were starting construction compared to finishing construction, demonstrating the significant reversal for the multifamily construction pipeline," Dietz said.

More acutely, apartments under construction dropped to 914,000, the lowest count since September 2022 and represent an 11% decrease from the peak rate seen in July of last year.

Overall building permits also saw a decline in May, decreasing 3.8% to an annualized rate of 1.39 million units, the NAHB said.

Regional differences are varied. Year-to-date data shows permits have increased slightly by 0.7% in the Northeast and 5.3% in the Midwest. The South saw an increase of 0.8%, whereas the West saw a decline of 1.5%.

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