KNOCKING DOWN WALLS

Americans are canceling new home construction plans as mortgage rates rise

Housing is canceled.
Housing is canceled.
Image: Reuters/Octavio Jones
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The US housing market is not as invincible as builders once thought it was.

New US home construction fell by 14.4% from April to May, and housing starts slowed down to the slowest pace since November 2020. The decline was led by multi-family unit construction, which dropped nearly 24%, but single-family construction fell, too, by 9.2%.

Permits—which would signal future residential construction—tumbled by 7%, and homebuilder sentiment is at its lowest since June 2020.

“With inflation running at a 40-year high, economic policy needs to focus on improving the supply side of the economy by bringing down material, energy and transportation costs,” Robert Dietz, chief economist at the National Association of Home Builders (NAHB), wrote in a blog post. “Due to supply-chain effects, there are 152,000 single-family units authorized but not started construction—up 3.4% from a year ago.”

Is the housing market pointing to a recession?

Earlier in the year, builders seemed to think that there was “no way the market could see a correction,” said Ali Wolf, chief economist at Zonda, a housing data provider. Mortgage rates have moved up at a faster pace than wage increases in recent months, going from near 3% at the beginning of the year to more than 6% by some measures now.

“We expect further declines in the months ahead, which itself is a recession warning for the quarters ahead,” Dietz said.