New construction growth slows as mortgage rates climb

Single-family housing authorizations increased by 1.21% year over year in May. However, the pace of year-over-year growth has slowed in recent months, in step with declining homebuilder sentiment, which fell eight points in May to the lowest reading since June 2020, according to the National Association of Home Builders. The sharp rise in mortgage rates coupled with double-digit increases in building material costs has continued to take a toll on homebuilders.

Affordability challenges posed by high home prices and rising mortgage rates have weakened buyer demand. According to the Mortgage Bankers Association, for the week ending June 3, total mortgage application volume fell 6.5% compared with the previous week, dropping to its lowest level in 22 years. Additionally, it’s possible that rising mortgage rates could diminish the supply of homes for sale, as some homeowners are likely to stay put to maintain their low, locked-in rate.

Homeowners continue to remodel and maintain their properties, which saw healthy growth in May. The increase in maintenance activity this month suggests last month’s blip is likely not indicative of a trend. However, the housing market has been unpredictable through 2022 and we’re closely monitoring how it reacts to expected rises in mortgage rates through the latter half of the year.

“The sharp increase in mortgage rates has led to a decline in home sales and mortgage applications, which is expected to spread to construction,” said Jonathan Kanarek, managing director, property intelligence solutions at Verisk. “While single-family housing authorizations rose in May, the pace of year-over-year growth has slowed in recent months. Because mortgage rates are not expected to meaningfully decline in the short-term, some homeowners may delay plans to list their home for sale in order to maintain their current low rate. I expect the housing market to remain at a slower pace than what was seen at the beginning of the year.”

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