By Lucia Mutikani
WASHINGTON, June 16 (Reuters) – U.S. single-family homebuilding fell to an eight-month low in May, pressured by higher mortgage rates and building material prices, suggesting the housing market could remain a drag on economic growth in the second quarter.
The decline combined with a plunge in multi-family housing starts to push down overall homebuilding to a six-year low last month, the report from the Commerce Department on Tuesday showed. Labor and building lots are also scarce, making it difficult for builders to respond to a housing shortage that has created an affordability crisis.
Residential investment, which includes homebuilding, has contracted for five straight quarters. A National Association of Home Builders survey on Monday showed home builder sentiment deteriorated in June.
“There is little indication that U.S. home building will break to the upside anytime soon, given high mortgage rates, previous over-building in the South, elevated new home inventories relative to sales, and the current depressed level of builder activity in the NAHB survey,” said Sal Guatieri, a senior economist at BMO Capital Markets.
Single-family housing starts, which account for the bulk of homebuilding, fell 1.9% to a seasonally adjusted annual rate of 882,000 units, the Commerce Department’s Census Bureau said on Tuesday. That level was the lowest since last September. Single-family homebuilding declined in the South and West regions, but increased in the Northeast and Midwest. It decreased 6.7% on a year-over-year basis in May.
Mortgage rates have risen as the U.S.-backed war with Iran drove up oil prices, boosting inflation and Treasury yields. The rate on the popular 30-year fixed-mortgage has increased more than 50 basis points since the conflict started in late February, data from mortgage finance agency Freddie Mac showed.
Washington and Tehran on Sunday said they had agreed terms to end the war and reopen the Strait of Hormuz. Prior to the war, the housing market was under pressure from import tariffs, which raised the prices of building materials and appliances.
Permits for future construction of single-family homes rose 0.6% last month to a rate of 886,000 units. Building permits increased in the Midwest and South, but fell in the Northeast and West. They fell 1.8% on a year-over-year basis in May.
Starts for housing projects with five units or more, a very volatile segment, plunged 41.6% to a rate of 284,000 units in May. Multi-family housing starts tumbled 12.3% on a year-over-year basis. Overall housing starts dropped 15.4% to a pace of 1.177 million units. They decreased 8.7% on a year-over-year basis in May.
Building permits for multi-family housing projects fell 3.5% to a rate of 474,000 units last month. Overall building permits slipped 0.7% to a rate of 1.413 million units last month. They fell 0.2% on a year-over-year basis in May. Residential investment, which includes homebuilding, has subtracted from gross domestic product for five straight quarters.
BUILDERS MANAGING NEW HOUSING INVENTORY
Some economists, however, viewed the decline in single-family housing starts as necessary, noting that the inventory of unsold new houses on the market remained elevated because of weak demand.
“This pullback should help to prevent an undesired backup in the inventory of new homes,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
U.S. stocks were higher in early trading. The dollar was steady against a basket of currencies. U.S. Treasury yields mostly fell.
A separate report from the Labor Department’s Bureau of Labor Statistics showed import prices rose more than expected in May, lifted by more expensive fuels and capital goods, and leading to the largest annual increase in nearly four years.
Import prices increased 1.9% last month after an upwardly revised 2.0% jump in April. Economists had forecast import prices, which exclude tariffs, would rise 1.0% after a previously reported 1.9% increase in April. In the 12 months through May, import prices advanced 6.7%, the largest increase since August 2022.
Import prices rose 4.2% on a year-over-year basis in April.
Consumer inflation increased at its fastest pace in three years in May, while producer prices posted their largest gain in 3-1/2 years, the government reported last week. With oil prices falling in response to the peace deal, imported inflation may have peaked last month or could be close to doing so.
High inflation and labor market stability have raised the chances that the Federal Reserve will raise interest rates. Economists, however, view the bar as high for monetary policy tightening, an argument strengthened by retreating oil prices.
U.S. central bank officials are holding a two-day policy meeting starting on Tuesday. The Fed is expected to keep its benchmark overnight interest rate in the 3.50%-3.75% range, but pivot away from an easing bias, economists predicted.
Prices of imported fuel increased 12.5% last month after shooting up 18.6% in April. Prices of imported food fell 0.1%.
Imported capital goods prices rose 1.3%. An artificial intelligence spending spree is pushing up imported capital goods prices. Excluding food and energy, import prices rose 1.0% after gaining 0.6% in April. They increased 4.2% on a year-over-year basis in May.
The cost of imported consumer goods, excluding automotives, increased 0.5%. Prices of imported automotive vehicles, parts and engines rebounded by 0.3%.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)
