The building of new homes plummeted in March, government data showed on Tuesday, at a time when the housing market is struggling with supply, which has contributed to elevated home prices.
Housing starts—where construction has begun—fell close to 15 percent last month compared to February to about 1.3 million, the lowest since August 2023, and were down more than 4 percent from the same time a year ago. Single-family housing starts also plunged 12 percent, according to data from the U.S. Census Bureau.
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On a regional basis, the Northeast saw a 36 percent drop, the Midwest declined by 23 percent and the South fell by 18 percent. The West bucked the trend by rising 7 percent in March.
"Housing starts fell in March and are starting to show cracks in the pace of growth," Jeffrey Roach, chief economist at LPL Financial, said in a note shared with Newsweek. "After years of undersupply, homebuilders scrambled to catch up with demand, but we are now seeing building activity cool down."
Building permit applications, while down more than 4 percent for the month, rose slightly from a year ago.
"Building permits, a leading indicator of future construction, also declined in March, suggesting building activity will likely slow in the coming months," Roach added.
Analysts suggested that a high interest rate environment is contributing to the slowdown, particularly for the multifamily sector of the market. Units of five or more homes declined by about 21 percent for the month and nearly 44 percent from March 2023, data showed.
"Residential homebuilding took a step back in early 2024 as high interest rates weighed on the credit-intensive sector," Bill Adams, chief economist at Comerica Bank, said in a note shared with Newsweek. "The multifamily segment of homebuilding is slowing the most. Most multifamily developments are build-to-lease and require long-term debt financing, which has become considerably more expensive as the Fed raised interest rates."
Since March 2022, the Federal Reserve hiked interest rates at an aggressive clip as a way to slow inflation. Rates stand at a 5.25 to 5.5 percent range, pushing up borrowing costs for loans, including in the housing sector.
Mortgage rates, for example, hover around 7 percent, which is discouraging buyers from entering the housing market, worried about high monthly payments. Builders are switching their strategies and focused on building smaller units to mitigate against affordability issues.
While single-family units declined on a monthly basis, they were about 21 percent higher compared to a year ago, data shows.
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"Basically, builders have been switching their focus from apartments to houses. They're building smaller, more affordable houses in response to affordability challenges brought on by higher mortgage rates," Holden Lewis, a housing expert at NerdWallet, said in a statement shared with Newsweek.
But the outlook going forward could be challenging as buyers are facing an environment of high mortgage rates and elevated prices.
"Housing construction is poised to slow as potential homebuyers indicate now is a poor time to buy a home," Roach said. "Housing activity may not fully stabilize until the Fed commences their easing cycle."
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