U.S. Housing Starts Pull Back Sharply In May

U.S. housing starts plummeted 9.8% in May to an annual rate of 1.256 million, significantly below the expected 1.360 million, driven by a near 30% drop in multi-family housing starts; building permits also declined 2.0% to 1.393 million, signaling a potential slowdown in future construction. Concurrently, homebuilder confidence deteriorated unexpectedly, with the NAHB/Wells Fargo Housing Market Index falling to 32, its lowest level since April 2020, reinforcing downside risks to residential investment forecasts.

Analysis

U.S. new residential construction experienced a significant downturn in May, with housing starts plunging 9.8% to an annual rate of 1.256 million, substantially below economists' expectations of 1.360 million and a sharp reversal from April's revised 2.7% increase. This decline was predominantly driven by a nearly 30% nosedive in multi-family housing starts to an annual rate of 332,000, while single-family starts posted a marginal 0.4% increase to 924,000. Further signaling a contraction in future activity, building permits fell 2.0% to an annual rate of 1.393 million, also missing forecasts and marking a second consecutive monthly decline, with permits for single-family homes dropping 2.7% and multi-family permits decreasing 0.8%. These figures, coupled with expert commentary such as Matthew Martin of Oxford Economics highlighting that May retail sales data suggested slowing home improvement spending, reinforce a downbeat residential investment forecast with risks skewed to the downside. This pessimistic outlook is further substantiated by the NAHB/Wells Fargo Housing Market Index, which unexpectedly fell to 32 in June from 34 in May, reaching its lowest level since April 2020 and indicating a continued deterioration in homebuilder confidence.

Key Decisions for Investors

• Investors should consider reducing exposure to companies heavily reliant on new U.S. residential construction, particularly in the multi-family segment, given the sharp declines in starts and permits.
• Heightened scrutiny is warranted for investments in homebuilders, building material suppliers, and related sectors due to the significant miss in housing data and deteriorating builder sentiment, which suggests potential earnings pressure.
• Anticipate potential negative revisions to residential investment forecasts and closely monitor upcoming housing market indicators for signs of stabilization or further decline, as these could influence broader market sentiment and economic outlook.
• Financial institutions with substantial exposure to mortgage origination and construction lending, such as Wells Fargo, may face headwinds from the observed slowdown and declining homebuilder confidence, potentially impacting loan growth and credit quality in these portfolios.