The number of residential groundbreakings spiked last month, suggesting a future softening of home prices and rental rates as more supply hits the market.
Construction on more than 1.6 million single-family and multifamily units kicked off in May, up 21.7% month-over-month and representing the highest rate since April 2022, according to the Census Bureau. The increase outpaced Bloomberg economist predictions by 200,000 units and was 5.7% ahead of last May, according to Yahoo Finance.
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A surge in new apartments coming online — expected to reach the highest levels since the 1980s in the second half of this year — means renters are poised to see continued relief, per Yahoo Finance. Bargaining power is already shifting toward tenants, with Redfin data showing new-lease asking rates dipping by 0.6% in May.
"Rents have cooled in part because the number of rentals on the market has grown, giving landlords less leeway to hike prices because they’re grappling with a rise in vacancies as renters get more options to choose from," Redfin data journalist Lily Katz wrote in a recent analysis.
Developers are also ramping up plans for future projects, with the number of building permits pulled in May accounting for approximately 1.5 million units, a monthly increase of 5.2%.
Homebuyers grappling with tight supply have increasingly turned to new construction, but the Federal Reserve’s repeat interest rate hikes have kept builders from accessing the capital needed to meet that demand. Even so, the share of homes on the market generated by new construction was more than 33% this spring, a significant uptick from the historic share of around 13%.
The rate on a 30-year fixed mortgage averaged 6.77% in the latest week, according to Mortgage Bankers Association data reported by Reuters. That is down from last November's high of above 7%, but tightening credit conditions could continue to hamstring the availability of construction loans.
May’s course correction suggests the market may be turning a corner as buyers adjust interest rate expectations and the Fed nears the end of its tightening cycle.
"The housing market has continued to normalize and recover as buyers have become more comfortable with higher mortgage rates," Lennar Corp. co-CEO Richard Beckwitt said last week on the builder's earnings call. "Inventory levels in the resale and new home market propelled demand for available new homes, and we offered a combination of attractive pricing and compelling mortgage rate programs to capture that demand."
The sentiment among builders is improving in tandem with a boost in new starts. The National Association of Home Builders/Wells Fargo Housing Market Index rose five points to 55 in June, the first time builder confidence has ventured into positive territory since last July, per NAHB.
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