Single-Family Home Construction Drops in June as Builders Wait for Rate Cuts

Construction activity on single-family homes dropped for the fourth straight month in June, as high interest rates weighed on building activity.

Single-family housing starts were at a seasonally adjusted annual rate of 980,000 last month, down 2.2% from May, according to U.S. Census data released on Wednesday. Permits for single-family homes also dropped 2.3% on the month, to a rate of 934,000.

Overall housing starts rose in June, driven by a 19% monthly increase in multifamily units, which are more volatile from month to month. Multifamily starts jumped to a four-month high of 373,000 annualized.

The slowdown in single-family home construction comes as higher interest rates weigh on both homebuyers and builders. Still, the level of newly built homes for sale is at its highest since fall 2022, as measured by months of inventory at current sales paces.

The U.S. had 9.3 months of inventory of new homes for sale in May, according to census data, compared with a total market inventory of 4.4 months. Six months of inventory is considered a balanced market, indicating the outsized role new construction plays in the current housing market, experts say.

Sales of newly built homes dropped 11% in May from the prior month, as high mortgage rates put a damper on the usual spring buying season. Builders have responded by shifting to smaller, more affordable homes for new builds.

The median price of new homes sold in the U.S. dropped below that of existing homes in May, reversing a longstanding trend.

“Demand for single-family housing is still strong. However, higher mortgage rates and record-high home prices have caused some prospective buyers to pause their home search,” says Bright MLS Chief Economist Lisa Sturtevant. “Builders continue to offer rate buydowns and upgrades to buyers, but traffic has dropped as affordability has become a growing concern and the inventory of existing homes has expanded.”

Homebuilders wait for relief on interest rates

The total number of single-family homes and apartments under construction was 1.56 million in June. This was the lowest total since January 2022.

Mortgage rates averaged 6.92% in June, according to Freddie Mac. High interest rates have also raised financing costs for builders, who must pay higher interest rates on loans to fund their projects.

"With mortgage rates hovering around 7% throughout the month of June, homebuyers and homebuilders have remained cautious," says Realtor.com® senior economist Joel Berner.

On Tuesday, a survey from the National Association of Home Builders found that builder confidence dropped slight in July, hitting its lowest level since December 2023.

“Lower single-family starts are in line with our latest builder surveys, which show that, while builders are concerned about the current high interest rate environment, they believe that mortgage rates will moderate in the coming months and lead to higher construction in the latter part of 2024,” says Carl Harris, chairman of the NAHB.

The survey also revealed that 31% of builders cut home prices to bolster sales in July, above the June rate of 29%. The average price reduction held steady at 6% in July for the 13th straight month. Meanwhile, the use of sales incentives held steady at 61% in July, the same reading as in June.

However, following promising declines in inflation, the Federal Reserve is widely expected to begin cutting its benchmark rate starting in September, which could bring relief to homebuyers and stimulate the housing market.

“An improving interest rate environment will help buyers as well as builders and developers who are contending with tight lending conditions and high interest rates,” said NAHB Chief Economist Robert Dietz. “And with home inventory at a relatively low 4.4 months’ supply, builders are prepared to increase production in the months ahead.”