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Residential construction in the US dropped to a five-year low in May, as homebuilders grappled with volatile tariffs on imported materials, stubbornly high mortgage rates and excess inventories of unsold units.
Housing starts fell 9.8 per cent month over month to a seasonally adjusted annual rate of almost 1.26mn homes in May, according to data released by the Census Bureau on Wednesday. It was the lowest reading since the Covid-19 pandemic stalled construction projects in 2020, and below the almost 1.36mn starts economists expected.
Permits for new construction also dropped more than expected to an annualised rate of 1.38mn units in May, the lowest since June 2020.
The soft data came just hours before the US central bank was due to issue its latest interest-rate decision on Wednesday afternoon and as President Donald Trump heaped further criticism on Federal Reserve chair Jay Powell for not cutting interest rates.
Economists said construction was being weighed down by the volatility of Trump’s trade war, which is expected to raise costs on crucial building materials. The US president has repeatedly threatened sweeping tariffs on trading partners, often before later pulling back.
“Homebuilders are putting a pause on new constructions in light of continued tariff uncertainty and the difficulty they face in pricing new projects as a result,” said Selma Hepp, chief economist at property consultant Cotality.
The subdued construction figures come after a survey by the National Association of Home Builders and Wells Fargo, released on Tuesday, found that homebuilder sentiment had sunk to the lowest level since 2022.
Builders reported that they were increasingly under pressure to slash prices and spend more on incentive packages — such as design credits and interest rate buydowns — in order to offload stock in a static market.
“Margins are being compressed,” said Ali Wolf, chief economist at construction data company Zonda. “If builders want to compete they now have to offer a lot of concessions.”
Wolf added that economic uncertainty among consumers was also weighing on the construction market. “Homebuilders need to know that they could sell a home in order to build a home [but] there’s a lot of doubt right now.”
These signs of weakness in the housing market come as the Fed prepares to announce its latest decision on interest rates. The central bank is widely expected to keep borrowing costs steady, but investors will be watching closely for any changes in policymakers’ forecasts, and for any dovish signals from Powell during his press conference.
“Mortgage rates at current levels are causing the housing sector to contract and prices to fall,” said Andrew Hollenhorst, chief US economist at Citi. “That’s one clear indication that the interest rates remain restrictive and will need to be reduced.”
The rate on a 30-year mortgage eased to 6.84 per cent in the week ending June 13 from 6.93 per cent seven days earlier, according to data on Wednesday from the Mortgage Bankers Association. Rates hit a 23-year high of almost 8 per cent in 2023 and have not been below 6 per cent since September 2022.
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