The recent downturn in the US housing market raises significant concerns for investors. Housing starts have decreased sharply, indicating a worrying trend. In May, the annual rate for privately-owned housing starts fell to 1,177,000 units. This figure represents a significant decline of 15.4% from the revised April total of 1,392,000 units and marks the lowest level of activity since the initial impact of the COVID-19 pandemic halted construction across the country.
This drop translates to over 200,000 fewer units being constructed in the course of a single month. From March's figure of 1,502,000 units to May's, the housing market has experienced a rapid downward shift.
How did the various housing segments perform? The single-family housing starts saw a minor decrease, landing at 882,000 units, which is 1.9% lower than the previous month. The multi-family sector, however, faced a severe downturn, with starts for buildings containing five or more units plummeting to 284,000.
In addition to the drop in housing starts, building permits, which are useful indicators of future construction activity, also showed a decline. The data for May revealed permits at 1,413,000, a slight decrease of 0.7% from April.
It's important to analyze the reasons behind this market decline. A key factor is the persistently high mortgage rates, which now exceed 6%. For instance, on a $400,000 house at an interest rate of 3%, monthly payments are around $1,686. When mortgage rates escalate to 6.5%, monthly payments increase up to approximately $2,528, creating a considerable burden on prospective buyers.
Additionally, the construction sector is grappling with labor shortages that extend project timelines and inflate costs. While material costs have decreased from pandemic highs, they remain above pre-COVID levels, adding further strain to construction budgets. Investors must watch these trends closely, as they could indicate broader economic implications and affect investment strategies in real estate and related sectors.