Builders Falter Under High Costs as Housing Starts Fall to Pandemic Levels

US housing starts plummeted nearly 10% in May to a 1.26 million annual pace, the lowest level since 2020, exacerbating the housing shortage and defying economists' expectations. This decline, coupled with headwinds from tariffs on metals and lumber, is raising input costs for homebuilders and further suppressing construction, according to BMO Senior Economist Priscilla Thiagamoorthy. With homebuilder sentiment already slumping, the data suggests continued pressure on residential construction and limited relief for the undersupplied housing market.

Analysis

US housing starts experienced a significant contraction in May, falling nearly 10% to an annual pace of 1.26 million units, the lowest level recorded since the pandemic-induced slowdown in 2020. This sharper-than-anticipated decline, as highlighted by economists, intensifies concerns over an already constrained housing supply, particularly for entry-level buyers, with current construction levels falling markedly short of the estimated 2 million new homes per year deemed necessary by experts like Heather Long of Navy Federal Credit Union. The downturn is attributed to a confluence of factors impacting homebuilders, including escalating input costs driven by tariffs on imported metals and lumber, persistently elevated borrowing costs, and growing inventory levels. This challenging environment is further underscored by slumping homebuilder sentiment, leading analysts such as BMO's Priscilla Thiagamoorthy to project continued pressure on residential construction activity for the foreseeable future, offering little prospect of immediate relief for the undersupplied housing market.

Key Decisions for Investors

• Investors should exercise caution with investments directly exposed to new home construction, such as homebuilder stocks, given the reported decline in housing starts, rising input costs from tariffs, and pessimistic builder sentiment.
• The persistent undersupply in the housing market, exacerbated by low construction rates, may sustain upward pressure on existing home prices and rental rates, potentially benefiting investments in these areas, though broader economic conditions must also be considered.
• Closely monitor upcoming housing market data, trends in commodity prices for construction materials like lumber and metals, and any shifts in trade policy or interest rates, as these factors will significantly influence the trajectory of the residential construction sector and related investments.