The US housing market is under renewed pressure. Data for May shows a dramatic collapse in new home starts, falling to the lowest level since the pandemic began, with the decline far exceeding market expectations.

Figures released by the US Department of Commerce on Tuesday revealed that housing starts in May plummeted by 15.4% month-over-month, a much steeper drop than the anticipated 2% decline and marking the largest monthly fall since March 2024. Concurrently, the data for April was revised down to show an 8.5% monthly decrease. After seasonal adjustment, the annualized rate of total housing starts for May dropped to its lowest point since the pandemic, a sharp reversal from just a month prior when the indicator was at a cyclical high for the year 2024.

Against a backdrop of persistently high housing inventory and elevated mortgage rates, residential construction activity has cooled significantly. Building permits in May declined by 0.7% from the previous month, largely in line with market expectations. However, permits for multi-family units continued to weaken, reflecting developers' continued caution in launching new projects.

Multi-Family Units Drag Down Overall Starts

Breaking down the structure of the data, the sharp retreat in May's starts was primarily driven by a pullback in multi-family housing. Starts for buildings with five units or more plunged to an annualized rate of 284,000 from a revised 486,000 in April. In contrast, single-family home starts showed relative stability, dipping only slightly to an annualized 882,000 from 899,000.

The permit data reveals a similar divergence. Permits for single-family homes edged up to 886,000 from a revised 881,000, continuing a pattern of modest growth. Permits for multi-family units, however, fell to 474,000 from 491,000, indicating a weakening appetite among developers to expand in the rental housing market.

High Rates and High Inventory Suppress Developer Sentiment

Analysis suggests the housing market is grappling with dual pressures from financing costs and inventory levels. On one hand, mortgage rates remaining elevated continue to suppress homebuyer demand. On the other hand, an increase in the inventory of homes for sale and a longer sales cycle are making developers more cautious about investing in new projects.

In this environment, the further slowdown in residential construction activity is raising questions about whether builder confidence may begin to wane. With the starts data showing a pronounced decline, the momentum of the US housing market's recovery is facing a significant test.