Permits for future U.S. homebuilding tumbled to a five-month low in April, suggesting the housing market was slowing as rising mortgage rates contribute to reduced affordability for entry-level and first-time buyers.
But the report from the Commerce Department on Wednesday also showed a record backlog of houses still to be constructed, indicating the moderation in homebuilding would be marginal. Homebuilding was already being constrained by soaring prices as well as shortages of materials. The housing market is the sector of the economy most sensitive to interest rates.
“Housing construction appears to be undergoing a transition, with the sector caught between sharply rising mortgage rates and declining affordability on the one hand and supply-chain constraints on the other that continue to result in rising backlogs of projects,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
Building permits dropped 3.2% to a seasonally adjusted annual rate of 1.819 million units in April, the lowest level since last November. The decline was concentrated in the single-family housing segment, where permits plunged 4.6% to a rate of 1.110 million units, the lowest level since last October.
Single-family permits fell in all four regions.
Permits for buildings with five units or more fell 0.6% to a rate of 656,000 units.
A survey on Tuesday showed the National Association of Home Builders/Wells Fargo Housing Market Index dropped to the lowest level in nearly two years in May. Builders blamed the fifth straight monthly decline in sentiment on soaring prices for building materials as well as rapidly rising mortgage rates.
The 30-year fixed-rate mortgage averaged 5.30% during the week ended May 12, the highest since 2009, according to data from mortgage finance agency Freddie Mac. It has increased by more than 100 basis points since mid-March when the Federal Reserve started raising interest rates to cool demand and bring down high inflation.
The U.S. central bank has hiked its policy interest rate by 75 basis points since March. The Fed is expected to increase that rate by half a percentage point at each of its next policy meetings in June and July.
Housing starts slipped 0.2% to a rate of 1.724 million units last month. Economists polled by Reuters had forecast starts would decline to a rate of 1.765 million units.
Single-family housing starts, which account for the biggest share of homebuilding, plunged 7.3% to a rate of 1.100 million units, also the lowest level since last October. Single-family homebuilding dropped in the Northeast, Midwest and the densely populated South, but rose in the West.
Starts for housing projects with five units or more surged 16.8% to a rate 612,000 units amid strong demand for rental apartments. Despite the second straight monthly decline in overall starts, homebuilding remains underpinned by record low housing supply. The backlog of houses approved for construction that are yet to be started rose 0.7% to an all-time high of 288,000 units in April.
“The housing market remains undersupplied, there is a significant housing supply shortfall which will not be restored in the near term,” said Abbey Omodunbi, senior economist at PNC Financial in Pittsburgh, Pennsylvania.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)