The number of multifamily units under construction hit a record in May of 994,000, a surge in supply that should help lower rent pressures.
Multifamily starts were up 33.2% year over year in May, according to the Census Bureau. The total number of housing starts unexpectedly grew in May, growing by the most since 2016 in a surprise reading for economists.
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It appears homebuilders are racing to bring units onto the market to replace the supply lost over the past year, as a huge run-up in mortgage rates has locked many people in their homes. Sales of existing homes have cratered because too many people are reluctant to give up mortgages with lower rates — a dynamic that has kept supply low and prices high.
The number of new private housing units under construction ballooned 21.7% over the past month, according to a Tuesday report. Starts are now running at a 1.631 million annual rate, adjusted for seasonal variation. From May 2022 to last month, starts increased by 5.7%.
For permits to build, which are seen as a proxy for future construction, the seasonally adjusted annual rate of new permits last month was 12.7% below the rate in May 2022. But permits were up 5.2% from April to May.
“The stark move higher in May suggests new home construction is ramping up, most likely as a result of the significant decline in lumber costs as of late,” said Peter Essele, head of portfolio management for Commonwealth Financial Network. “With rising home prices and falling input costs, builders are ramping up, a scenario that should help alleviate the dearth in supply.”
Tuesday’s report is a bit of a bright spot, as it comes as the Federal Reserve’s campaign to slow spending across the economy by hiking interest rates has taken a major toll on the national housing market.
The rate on the average 30-year fixed-rate mortgage soared from just over 3% at the start of 2022 to over 7% in November. It has since drifted a bit to 6.69%, according to numbers from Freddie Mac.
There are other signs the housing market is highly favorable for new construction. This week, the National Association of Home Builders announced that its builder confidence index rose five points to 55, the first time it was in positive territory in nearly a year.
“Builders are feeling cautiously optimistic about market conditions given low levels of existing home inventory and ongoing gradual improvements for supply chains,” said NAHB Chairwoman Alicia Huey, a custom home builder and developer from Alabama.
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Additionally, new home sales in April rose 4.1% to a seasonally adjusted annual rate of 683,000, according to the Census Bureau. Sales were 11.8% lower than in April 2022.
The Fed also paused its rate hiking this month for the first time in over a year. The central bank’s key overnight rate target will remain at 5% to 5.25%. Rates are still the highest they have been since 2007, at the outset of the global financial crisis.