The number of housing units that started construction in May fell to the lowest level since 2020, as the sector battles headwinds blown by high interest rates.
Housing construction dropped 9.8 percent from April to May, the Commerce Department reported Wednesday. If construction continued at that pace through the year, there would be 1.25 million units built in 2025, down from a pace of 1.39 million reached in April.
The number is down 4.6 percent from a year ago, when the pace was 1.4 million units.
“Housing starts plunged in May as builders step back in 2025 amidst fading demand and rising costs,” Nationwide economist Ben Ayers wrote in a commentary.
New building permits were down 2 percent from April. Housing completions were up 5.4 percent on the month but were still down 2.2 percent on the year.
The housing sector was jolted by interest rate hikes delivered by the Federal Reserve in response to soaring post-pandemic inflation.
While interest rate hikes combat inflation by slowing the pace of borrowing, they can also bolster the price of housing directly by making financing more expensive. Most housing is paid for with debt.
Inflation as measured by the consumer price index (CPI) has fallen to an annual increase of 2.4 percent, but shelter inflation is still at 3.9 percent. Housing inflation has lagged headline inflation throughout the post-pandemic period.
Rates on the 30-year fixed rate mortgage were at 6.84 percent this week, still way above pre-pandemic rates around 3.5 percent.
Meanwhile, housing inventories are at their highest level since November 2019.
The U.S. has a huge shortage of affordable housing. The National Association of Home Builders put the shortage at 1.5 million units in 2021 while government mortgage backer Freddie Mac put it at 3.8 million units and the National Association of Realtors estimated it at 5.5 million units.
Analysts noted Wednesday that the May drop in starts was concentrated in multifamily construction, which does not bode well for the affordable housing shortage.
“A sharp downward shift in multifamily construction drove the decline in May,” Ben Ayers wrote.
