US single-family housing starts rise in May; permits slump

U.S. single-family homebuilding edged up 0.4% in May to a seasonally adjusted annual rate of 924,000 units, but a 2.7% drop in permits for future construction signals potential weakness in the housing market. Rising construction costs due to tariffs and elevated inventory levels are creating headwinds, while elevated interest rates continue to sideline potential buyers. A recent survey also indicated a significant drop in homebuilder sentiment, forecasting a decline in single-family starts for the year.

Analysis

U.S. single-family homebuilding showed a marginal increase of 0.4% in May to a seasonally adjusted annual rate of 924,000 units, but this modest gain is overshadowed by significant negative indicators. Permits for future single-family construction, a key leading indicator, fell sharply by 2.7% to an 898,000 unit rate, signaling anticipated weakness. The housing market faces considerable headwinds, including increased construction costs stemming from U.S. import duties on materials like lumber, aluminum, and steel. Concurrently, an excess inventory of unsold new single-family homes, reaching levels last seen in late 2007, is pressuring the market. Higher borrowing costs, with the Federal Reserve maintaining its benchmark interest rate in the 4.25%-4.50% range after pausing its rate cutting cycle, continue to sideline potential buyers. This challenging environment is reflected in the National Association of Home Builders (NAHB) sentiment index, which plummeted to a 2-1/2-year low in June, with an increasing share of builders resorting to price cuts and the NAHB forecasting a decline in single-family starts for the year. Residential investment, which includes homebuilding, contracted slightly in the first quarter, and economists, such as Stephen Stanley of Santander U.S. Capital Markets, anticipate a "substantial decline in real activity" in the current quarter and potentially into the summer, underscoring a deteriorating outlook for the sector.

Key Decisions for Investors

• Investors should exercise caution regarding investments directly exposed to the U.S. single-family homebuilding sector, given the confluence of falling permits, high inventory levels, increased construction costs, and declining builder confidence.
• Closely monitor upcoming housing permit data, builder sentiment surveys, inventory reports, and Federal Reserve commentary on interest rates as critical indicators of the sector's trajectory and its potential broader economic impact.
• Evaluate companies within the construction supply chain and related industries for vulnerability to sustained cost pressures from tariffs and a potential slowdown in new construction activity, and consider the increased likelihood of builders cutting prices to stimulate demand.