Economic Report: Builders break ground on more new homes in May, but U.S. housing starts disappoint again

The numbers: Construction on new homes rose slightly in May, but high lumber prices and labor shortages have stymied builders and could leave many customers frustrated as the busy U.S. summer home-buying season gets underway.

Builders started construction on new homes at a 1.57 million annual pace in May, the U.S. Census Bureau said Wednesday.

In other words, that’s how many houses would be started in a year if construction companies did the same amount of work every month as they did in May.

The increase was somewhat of mirage, however. April’s originally reported increase of 1.57 million was trimmed to 1.52 million.

Permits to build new homes, meanwhile, fell 3% last month in another sign of the trouble builders are running into. They slipped to an annual rate of 1.68 million from a revised 1.73 million in April.

Read: High lumber prices and other barriers choke the confidence of home builders and home buyers

Big picture: Demand for new homes is sky high with the economy recovering from the pandemic and mortgage interest rates still near rock bottom. Housing starts and permits recently hit a 15-year peak.

The problem is, construction companies simply can’t build new homes fast enough or keep the prices within most the range of most buyers.

High costs of raw materials, a shortage of skilled workers, and a limited number of vacant lots all pose barriers to new construction.

The result: Home shoppers should expect a limited selection of properties of sale and higher home prices, potentially limiting the number of buyers.

Applications for new mortgages, for example, have declined recently in a sign that higher prices are scaring away buyers.

What’s compounded the problem is a paucity of existing homes for sale. Listings have tumbled 13% since they touched a 14-year high last October.

The housing market has been a big contributor to the U.S. economic recovery. It’s likely to continue to play a big role, just not as big as it has in the past year.

Read: How high will inflation go? Check out MarketWatch’s new tracker.

Key details: New construction on single-family houses increased by a solid 4.2% to 1.1 million rate in May, but permits declined again. Permits have fallen almost 11% from a 15-year high in January.

About two-thirds of new units built are single-family homes.

Builders also started work on more multi-family projects with at least five units: Condos, townhouses, apartment buildings and the like. They increased 4% to an annual rate of 465,000.

Permits on multi-family units also fell, however.

Construction increased sharply in the Midwest and grew more slowly in the South and West. Only the Northeast saw a decline.

Home building is much higher in all four regions compared to one year ago, but construction is likely to take place at a more subdued pace until all the bottlenecks ease.

There is some good news. Lumber prices have tumbled 40% from a record peak in May, for example. Yet some of the barriers to construction, such as a shortage of skilled labor, have existed for years and are likely to be a chronic problem.

What they are saying? “The issue in the housing market, as with much of the broader economy, isn’t the demand side of the market,” said chief economist Richard Moody of Regions Financial. “Rather, it is the ability of producers, or, in this case builders, to meet that demand. That is an issue for which there is no quick fix.”

Market reaction: The Dow Jones Industrial Average DJIA X% and S&P 500 SPX rose slightly in Wednesday trades.

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June 17, 2021 at 01:54AM
Jeffry Bartash
http://www.marketwatch.com/news/story.asp?guid=%7B20C05575-04D4-B545-74AF-5871EB13CAFA%7D&siteid=rss&rss=1