Another indication the hot housing market is cooling off? New residential construction and the number of permits issued for building homes both fell in May.
The number of housing starts fell for the second month in a row in May, dropping 14.4% from April and 3.5% from the year before. The pullback was driven by declines in both single-family and multi-family new home construction.
Uncertainty around quickly changing economic conditions, like inflation data and the Federal Reserve’s interest rate hike, has caused sentiment in the building industry to falter, said Kelly Mangold of RCLCO Real Estate Consulting.
“Housing starts slowed in reaction to these factors, as well as in light of persistent supply chain issues,” she said.
However, the job market continues to perform strongly and Millennials are still starting families, indicating that there is likely still pent-up demand for housing, she said. But, given the high prices and higher mortgage rates, she added that many buyers are still hesitant to jump into the market.
“Some may be taking a more ‘wait-and-see’ stance until conditions settle down,” she said.
Homebuilder sentiment declined for the sixth month in a row in June, according to the National Association of Home Builders, a clear indication of a slowing market. Builders have taken a more cautious stance as rising mortgage rates soften demand, it said.
Applications to purchase new homes in May fell 4% from April, and 5% from a year ago, according to the Mortgage Banker’s Association.
Demand for homes, which was already hampered by tight inventory, rising home prices and extended building completion times, took another hit as mortgage rates rose above 5.5% last month, said Joel Kan, MBA’s associate vice president of economic and industry forecasting.
Despite a small dip in late May, mortgage rates continue to climb, forcing buyers to make tough decisions around whether or not to push forward in their efforts to purchase a home, said Hannah Jones, Economic Data Analyst at Realtor.com.
On the upside, Jones said, home price acceleration is showing early signs of steadying.
“Should home completions ramp up, buyers will see some relief in the form of increased housing supply,” she said. “Despite lower near-term housing demand, the need for new construction remains pressing to close the sizable decade-long housing supply gap and create a more favorable environment for buyers.”