By Lucia Mutikani
WASHINGTON, June 16 (Reuters) – U.S. single-family homebuilding fell to an eight-month low in May, pressured by higher mortgage rates and building material prices, suggesting the housing market could remain a drag on economic growth in the second quarter.
The decline combined with a plunge in multi-family housing starts to push down overall homebuilding to a six-year low last month, the report from the Commerce Department on Tuesday showed. Labor and building lots are also scarce, making it difficult for builders to respond to a housing shortage that has created an affordability crisis.
Residential investment, which includes homebuilding, has contracted for five straight quarters. A National Association of Home Builders survey on Monday showed home builder sentiment deteriorated in June.
“There is little indication that U.S. home building will break to the upside anytime soon, given high mortgage rates, previous over-building in the South, elevated new home inventories relative to sales, and the current depressed level of builder activity in the NAHB survey,” said Sal Guatieri, a senior economist at BMO Capital Markets.
Single-family housing starts, which account for the bulk of homebuilding, fell 1.9% to a seasonally adjusted annual rate of 882,000 units, the Commerce Department’s Census Bureau said. That level was the lowest since last September.
Single-family homebuilding declined in the South and West regions, but increased in the Northeast and Midwest. It decreased 6.7% on a year-over-year basis in May.
Mortgage rates have risen as the U.S.-backed war with Iran drove up oil prices, boosting inflation and Treasury yields. The rate on the popular 30-year fixed-mortgage has increased more than 50 basis points since the conflict started in late February, data from mortgage finance agency Freddie Mac showed.
Washington and Tehran on Sunday said they had agreed terms to end the war and reopen the Strait of Hormuz. Prior to the war, the housing market was under pressure from import tariffs, which raised the prices of building materials and appliances.
Permits for future construction of single-family homes rose 0.6% last month to a rate of 886,000 units. Building permits increased in the Midwest and South, but fell in the Northeast and West. They fell 1.8% on a year-over-year basis in May.
Starts for housing projects with five units or more, a very volatile segment, plunged 41.6% to a rate of 284,000 units in May. Multi-family housing starts tumbled 12.3% on a year-over-year basis. Overall housing starts dropped 15.4% to a pace of 1.177 million units. They decreased 8.7% on a year-over-year basis in May.
Building permits for multi-family housing projects fell 3.5% to a rate of 474,000 units last month. Overall building permits slipped 0.7% to a rate of 1.413 million units last month. They fell 0.2% on a year-over-year basis in May.
Stocks on Wall Street were trading higher on optimism around the peace deal. The dollar edged lower against a basket of currencies. U.S. Treasury yields mostly fell.
BUILDERS MANAGING NEW HOUSING INVENTORY
Some economists, however, viewed the decline in single-family housing starts as necessary, noting that the inventory of unsold new houses on the market remained elevated because of weak demand.
“This pullback should help to prevent an undesired backup in the inventory of new homes,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
The number of single-family houses approved for construction that are yet to be started rose 2.1% to 144,000 units, while completions dropped 1.6% to 872,000 units — the lowest level in six years. The NAHB projected the national housing shortage at about 1.2 million homes. The inventory of single-family housing under construction slipped 0.3% to 587,000 units.
“Policy needs to address the supply side of the housing equation to successfully deal with the affordability crisis in the U.S.,” said Jeffrey Roach, chief economist at LPL Financial.
High inflation and labor market stability have, however, raised the chances that the Federal Reserve will raise interest rates, making it unlikely that mortgage rates will come down significantly.
But economists view the bar as high for monetary policy tightening, an argument strengthened by retreating oil prices.
U.S. central bank officials are holding a two-day policy meeting starting on Tuesday. The Fed is expected to keep its benchmark overnight interest rate in the 3.50%-3.75% range, but pivot away from an easing bias, economists predicted.
A separate report from the Labor Department’s Bureau of Labor Statistics showed import prices increased 1.9% in May, lifted by more expensive fuels and capital goods, after an upwardly revised 2.0% jump in April. Economists had forecast import prices, which exclude tariffs, would rise 1.0% after a previously reported 1.9% increase in April.
Import prices have increased strongly since January, and last month’s rise was despite Brent crude prices pulling off multi-year highs. In the 12 months through May, import prices advanced 6.7%, the largest increase since August 2022. Import prices rose 4.2% on a year-over-year basis in April.
The report mirrored strong readings in consumer and producer prices in May. Economists were optimistic that inflation peaked in May, given the pullback in oil prices.
Prices of imported fuel increased 12.5% last month after shooting up 18.6% in April. Prices of imported food fell 0.1%.
Imported capital goods prices rose 1.3%, reflecting an artificial intelligence spending spree that is being satisfied with foreign products. Excluding food and energy, import prices rose 1.0% after gaining 0.6% in April. They increased 4.2% on a year-over-year basis in May.
“Outside of fuels, we do expect to see more moderate growth in computer product inflation as much of the surge in memory (chip) price growth is expected to be done by this quarter, though it will continue to pass through into final product prices like laptops and smartphones for some time,” said Abiel Reinhart, an economist at JPMorgan.
(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci )