Groundbreaking for single-family homebuilding projects in the United States increased in May by a level not seen in over thirty years, and permits for new construction also increased, suggesting that the housing industry may be recovering after being severely hit by Federal Reserve hikes in interest rates.
Although the Fed decided not to raise interest rates this month for the very first time since early 2022, credit conditions are still tightening, which may make it difficult for builders who heavily rely on construction and development loans to maintain the pace of May's recovery in the months to come.
Indeed, economists pointed out that multifamily building projects with finance in place from the previous year helped to drive May's growth and that these gains may level down as the year goes on as it becomes more difficult to secure new funding.
The Commerce Department claimed on Tuesday that the number of housing starts increased to 1.631 million units on a yearly rate that is seasonally adjusted in May from a downwardly adjusted 1.34 million in April. After April 2022, rate in May was the highest.
The number of starts increased by 291,000, the greatest since January of 1990, and 21.7% since October of 2016 was the biggest percentage increase.
Despite the volatility of housing start data, which may cause this number to be revised lower in the months to come, the magnitude of the increase indicates that builders are significantly growing their businesses this summer.
Starts increased in the South, West and Midwest by double digit margins while falling by almost 19% in the Northeast. The number of single-family starts increased by 18.5%, while multi-family projects with at least five units increased by 28.1%.
Not all economists shared the belief that May's improvement signaled the beginning of a sustained resurgence.
Thomas Simons, a US economist with Jefferies, noted that the level of strength is so out of line with the norm that it raises concerns about sustainability. He added that efforts to rebuild after a destructive spring tornado season, that is not likely to be repeated, may be the cause of the roughly 67% increase in starts across the Midwest.
The Fed's quickest tightening of monetary policy campaign since the 1980s has had the largest negative impact on the housing market, but recent data indicate that the worst may be over.
The well-known 30-year fixed mortgage's average interest rate has decreased from its peak above 7% in November of last year. The most recent week saw an average of 6.77%, according to data released by the Mortgage Bankers Association.
However, as the association's report was released on Monday, the head of NAHB addressed the possibility that tightened lending conditions would make it more difficult for builders to secure funding for new projects.
As the sector attempts to grow off cycle lows, access to builder and developer loans has grown more challenging over the past year, which will ultimately lead to decreased lot supplies, according to a statement from Alicia Huey, the NAHB Chairman.
The Fed has increased interest rates by five percentage points since March of 2022, but this month it took a break to evaluate the results of those moves. Rate increases are likely to come back next month since inflation is still too high.
The majority of Fed members do, however, believe that only one or two additional quarter-point rate increases are required, and as a result, industries that are sensitive to rates, like the housing market, are beginning to show signs of growth.
Construction permits, for instance, increased 5.2% to 1.491 million units, the highest level since October, driven primarily by a Northeast increase of 27.1%. Multi-family projects saw a 7.8% increase in permits while single-family projects saw a 4.8% increase.
According to Comerica Bank Chief Economist Bill Adams, the second half of this year will see home building contribute to US economic growth. The growth of the gross domestic product has been slowed by residential building for eight consecutive quarters.