New U.S. housing starts registered the biggest monthly increase in more than 30 years in May, but some experts raised doubts about whether the trend is sustainable.
“Privately owned housing starts in May were at a seasonally adjusted annual rate of 1,631,000. This is 21.7 percent above the revised April estimate of 1,340,000,” according to a June 20 press release by the U.S. Census Bureau. The increase of 291,000 housing starts between April and May 2023 is the largest monthly increase since 1990. Moreover, the 21.7 percent gain in May was the largest percentage increase since October 2016.
Region-wise, housing starts rose the most in the Midwest, jumping by 66.9 percent from April to May. The South saw an increase of 20.3 percent while the West registered a 16.4 percent gain. Housing starts fell by 18.7 percent on a monthly basis in the Northeast.
Some experts see the rise in housing starts as the sign of a strengthening market. But Jefferies U.S. economist Thomas Simons disagrees. “The strength is so far off trend that it calls sustainability into question,” he wrote in a note, according to Reuters.
Rising Mortgage Applications, Decline in Existing-Home Sales
The increase in housing starts was also accompanied by a rise in mortgage applications, according to data from the Mortgage Bankers Association (MBA). Mortgage applications rose by 8 percent in May 2023 from a month back, and is up by 16.6 percent from a year ago, according to a press release on June 20.“Purchase activity for newly built homes was strong in May, with builders continuing to bring homes to the market and buyers keen to act on available units,” said Joel Kan, MBA’s vice president and deputy chief economist.
Kan pointed out that while the new home sales segment continues to grow at a pace of 5 percent compared to a year ago, existing-home sales in recent months have continued to see annual declines of more than 20 percent on a non-seasonally adjusted basis.
“These results were also broadly in line with the census data showing an uptick in residential housing starts and permitting in recent months.”
The decline in existing-home sales can be attributed to the elevated mortgage rates. According to data from Freddie Mac, a 30-year fixed-rate mortgage had an average interest rate of 6.69 percent as of June 15, up from 2.93 percent two years back.
A June 14 press release from real estate brokerage Redfin points out that 91.8 percent of U.S. homeowners have mortgages with an interest rate below 6 percent, with 82.4 percent having a rate lower than 5 percent, 62 percent having below 4 percent, and 23.5 percent having rates less than 3 percent.
Boost in Builder Confidence
There has also been an increase in builder confidence. According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), builder confidence in the market for newly built single-family homes in June rose five points, to 44, the sixth straight month that the index has increased.This is also the first time the sentiment has exceeded the 50 level since July last year. However, the boost in builder confidence may not result in more supply entering the home sales market, according to NAHB chairman Alicia Huey.
“Access for builder and developer loans has become more difficult to obtain over the last year, which will ultimately result in lower lot supplies as the industry tries to expand off cycle lows,” she said, according to a June 19 press release.
Builders continued to provide sales incentives in June. Fifty-six percent of builders were found offering incentives to buyers while 25 percent of them reduced home prices to boost sales.
