US home building surged in May, climbing 21.7% from April, as low inventory in the existing home market continued to boost interest in new homes.
Housing starts, a measure of new home construction, came in far beyond expectations that they would decline by 0.1%, according to data released Tuesday by the Census Bureau.
The number of units rose in May to a seasonally adjusted annual rate of 1.631 million, above expectations for 1.40 million and above the revised April estimate of 1.34 million.
Building permits, which track the number of new housing units granted permits, also rose in May, after dropping in March and April. Permits were up 5.2% from the revised April rate of -1.5%.
A separate survey released on Monday from the National Association of Home Builders revealed that the lack of inventory in the existing home market — as current homeowners hunker down with their ultra-low interest rates — continues to boost home builder sentiment.
The National Association of Home Builders/Wells Fargo Housing Market Index gauges market conditions and looks at current sales, buyer traffic and the outlook for sales of new construction homes over the next six months.
The index rose again in June, marking the sixth-straight month that builder confidence has increased and the first time that sentiment levels have surpassed the midpoint of 50 since July 2022.
“A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” said Robert Dietz, chief economist at the NAHB. “The Federal Reserve nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans.”
Dietz added that the Federal Reserve and Washington policymakers must take into consideration how the state of home building is critical for the inflation outlook and the future of monetary policy.
“Shelter cost growth is now the leading source of inflation, and such costs can only be tamed by building more affordable, attainable housing — for-sale, for-rent, multifamily and single-family,” he said. “By addressing supply chain issues, the skilled labor shortage, and reducing or eliminating inefficient regulatory policies such as exclusionary zoning, policymakers can play an important and much-needed role in the fight against inflation.”
It is good news for home buyers that builders feel more optimistic, given low levels of existing home inventory and ongoing gradual improvements for supply chains, said Alicia Huey, NAHB’s Chairman.
“However, access for builder and developer loans has become more difficult to obtain over the last year, which will ultimately result in lower lot supplies as the industry tries to expand off cycle lows.”
Another sign that builders are optimistic that purchase demand is strong is that overall, builders are gradually pulling back on sales incentives.
The share of builders cutting prices to boost sale dropped to 25% in June, down from 27% in May and 30% in April. It has declined steadily since peaking at 36% in November 2022.
In addition, the average price reduction for a new home was 7% in June, below the 8% rate in December 2022. A little over half of builders offered incentives to buyers in June, less than in December 2022, when the share was 62%.