More houses will soon be built in a neighborhood near you

  • Residential construction surged last month as housing starts jumped 21.7% compared to April.
  • Housing starts – also known as new housing – rose at the highest monthly rate since 2016.
  • As the Fed pauses rate hikes, mortgage rates fall and consumer sentiment rises.

Rising costs are keeping potential home sellers out of the real estate market, exacerbating the country’s ongoing housing shortage and resulting in fewer home sales.

There is a glimmer of hope: As higher mortgage rates discourage homeowners happy with their low, fixed interest rates from moving, homebuilders are stepping up their building efforts.

According to a US Census Bureau report released on Tuesday, housing construction surged in May as housing starts — also known as new housing — rose 21.7% from April. The strength of the starts came as a shock to many analysts who had been expecting a more modest increase.

According to Bloomberg, the 1.6 million+ launches were well above the 1.4 million forecast by economists.

Between April and May, housing starts increased month-on-month at the fastest rate since 2016. Single-family housing starts increased 18.5% to a seasonally adjusted annual rate of 997,000 and multi-family housing starts increased 27.1% to an annualized rate of 634,000. May marked an 11-month high in new home construction.

The number of building permits, which measures the number of new housing units granted but construction has not necessarily started, rose 5.2% in May after falling 1.5% in April.

To counter rising inflation, the Federal Reserve has successively raised interest rates over the past 15 months. As a result, mortgage rates rose sharply, topping the 7% mark last November, slowing new and existing home sales. However, as the Fed adjusts monetary policy and suspends rate hikes, mortgage rates tend to fall and more homebuyers are returning to the market.

Builders looking to take advantage of revived demand and reduced supply are now building more homes.

“With the low inventory of existing homes and ongoing incremental improvements in supply chains, homebuilders are cautiously optimistic about market conditions,” Alicia Huey, chair of the National Association of Homebuilders, wrote in a housing report.

According to the National Association of Home Builders and Wells Fargo, homebuilder confidence rose for the sixth straight month in June as demand for new homes picked up in May. The June reading marks the first time since 2022 that both the current and future revenue components of the corporate index topped 60.

“A nadir is emerging for single-family home construction as homebuilder sentiment continues to gradually improve year-to-date,” Robert Dietz, NAHB’s chief economist, said in a statement, adding that improved economic conditions bode well for homebuilders too.

“The fact that the Federal Reserve is nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and financing costs for construction and developer loans,” Dietz said.

But despite improvements in the housing sector, the reality is that the country’s homebuyers are ahead of the curve.

According to the NAHB, developers offered buyers incentives such as discounts and free upgrades 56% in June, compared to 54% in May. Additionally, 25% of homebuilders cut home prices to boost sales over the month, with an average price cut of 7%.

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