High mortgage rates, slowing homebuyer activity and weak sentiment among homebuilders created a perfect storm in June that prevented new home construction from achieving annual growth.
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While homebuilding activity is growing month over month, it still lags behind 2023, according to the latest new home construction report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
Building permits increased 3.4% quarterly to a seasonally adjusted annual rate of 1,446,000; however, permitting activity was down 3.1% from the June 2023 seasonally adjusted annual rate of 1,493,000. The number of single-family building permits fell 2.3% from May to June to 934,000.
Housing starts followed a similar trend in May, rising on a monthly basis but falling on an annual basis. The seasonally adjusted annual rate of private housing starts in June reached 1,353,000 units, 3.0% higher than in May and 4.4% lower than in June 2023. After adjusting for sex, the annual growth rate decreased by 2.2% to 1,002,000.
Housing completions in June were well above 2023 levels, although permit numbers and construction starts have declined year over year.
The completed area of private residential buildings increased by 10.1% from the previous quarter and 15.5% year-on-year. The seasonally adjusted annual growth rate was 1.71 million units. Single-family home completions increased slightly, up 1.8% from the previous month to a seasonally adjusted annual rate of 1,019,000 units.
Dr. Lisa Sturtevant, chief economist at Bright MLS, said the decline in apartment construction is “not surprising” given the breakneck pace builders are maintaining in 2023 to meet rising rental demand.
“A record number of apartments were delivered in some U.S. markets in 2023, leading developers to refrain from bringing new apartments to market,” she said in a statement. “Last year, rents fell in some markets and property managers offered rent and other Discounts to attract renters.”
“New construction starts for buildings with five or more units in June 2024 (360,000 units) were down 23.4% from a year ago,” she added.
In terms of single-family housing starts, Sturtevant and Realtor.com senior economist Joel Berner said the slowdown in permits and starts reflects slower homebuyer activity and weakening sentiment among homebuilders amid market headwinds.
“Demand for single-family homes remains strong; however, higher mortgage rates and record-high home prices have caused some potential buyers to pause on their home purchases,” Sturtevant said. “…Builders continue to offer price cuts and upgrades to buyers, but foot traffic is down as affordability becomes a growing concern and inventory of existing homes increases.”
Berner said the latest inflation report raised hopes of imminent interest rate cuts, which could prompt homebuyers to snap up lingering inventory of new homes.
“Homebuilder confidence has fallen for a third consecutive month as construction companies worry about having unsold new inventory on their hands, while homebuyers are delaying purchases until their financing options improve,” he said. “However, the latest “The inflation report could prompt a rate cut, spurring new homebuyer activity to coincide with this month’s positive construction news.”
While the June report showed bleak annual trends, Berner and First American deputy chief economist Odeta Kushi said monthly increases in permits, starts and completions are a silver lining the industry should not ignore.
“Home prices remain near all-time highs, but strong year-over-year inventory growth and a slow pace of new home sales pose a threat to homebuilders seeking to profit from new construction projects,” Berner said in a statement. “Despite these headwinds, residential construction showed signs of improvement in June.”
Kush added: “Despite the challenging environment, the housing market remains structurally inadequate. For more than a decade, housing construction has not kept pace with demand for housing, creating a housing supply shortage that has proven difficult to reduce significantly. As As builders break ground on more housing, we will get closer to balancing the housing deficit.
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