Rising Interest Rates, Higher Construction Costs Slow Housing Production

Rising interest rates and ongoing building material supply chain disruptions that raise construction costs continue to act as significant headwinds on the housing market.

Overall housing starts fell 14.4 percent to a seasonally adjusted annual rate of 1.55 million units in May from an upwardly revised reading the previous month, according to a report from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

The May reading of 1.55 million starts is the number of housing units builders would begin if development kept this pace for the next 12 months. Within this overall number, single-family starts decreased 9.2 percent to a 1.05 million seasonally adjusted annual rate. The multifamily sector, which includes apartment buildings and condos, decreased 23.7 percent to an annualized 498,000 pace.

“Single-family home building is slowing as the impacts of higher interest rates reduce housing affordability,” said Jerry Konter, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Savannah, Georgia. “Moreover, construction costs continue to rise, with residential construction materials up 19 percent from a year ago. As the market weakens due to cyclical factors, the long-term housing deficit will persist and continue to frustrate prospective renters and home buyers.”

“In further signs that the housing market is weakening, single-family permits are down 2.5 percent on a year-to-date basis and home builder confidence has declined for the last six months,” said NAHB chief economist Robert Dietz. “Due to the acceleration in construction activity in recent quarters, housing completions are rising. Single-family completions were up 8.5 percent in May 2022 compared to May 2021 as inventories rise.”

On a regional and year-to-date basis, combined single-family and multifamily starts are 2.1 percent higher in the Northeast, 1.2 percent higher in the Midwest, 12.9 percent higher in the South, and 4.3 percent higher in the West.

Overall permits decreased 7.0 percent to a 1.70 million unit annualized rate in May. Single-family permits decreased 5.5 percent to a 1.05 million unit rate. This is the lowest pace for single-family permits since July 2020. Multifamily permits decreased 9.4 percent to an annualized 647,000 pace.

Looking at regional permit data on a year-to-date basis, permits are 8.3 percent lower in the Northeast, 5.2 percent higher in the Midwest, 4.6 percent higher in the South, and 1.6 percent higher in the West.

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