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Home construction rebounded less than expected in May as the rising cost of lumber and shortages of other materials continued to restrict builders’ ability to take advantage of the severe shortage of homes in the market.
The latest housing report from the Commerce Department on Wednesday also showed that permits to build future homes fell to a seven-month low. Home completions also declined, while the number of homes licensed to build yet to start rose to the highest level since 1999, indicating that supply is likely to remain tight for some time and support home price inflation.
“A shortage of materials and labor is causing builders to struggle to ramp up production of new homes, even though demand remains strong,” said Robert Frick, company economist at Navy Federal Credit Union. “Prospective homebuyers should expect low inventories and higher prices for both new and existing homes for the foreseeable future.”
Housing starts rose 3.6 percent to a seasonally adjusted annual rate of 1.572 million units last month. April data was revised to a rate of 1.517 million units from the previously reported 1.569 million units.
Leading activity rose in the densely populated Midwest, West, and South, but declined in the Northeast.
Economists polled by Reuters had expected an increase of 1.630 million units. Last month’s increase still started below March’s rate of 1.725 million units, the highest level since June 2006. However, housing starts jumped 50.3 percent year-on-year in May.
Single-family home construction, the largest share of the housing market, increased 4.2 percent to an average of 1.098 million units. The beginnings of the volatile multi-family sector rose 2.4 percent to a pace of 474,000 units.
Softwood prices rose 154.3 percent year-on-year in May, according to the latest producer price data. Timber futures have fallen from historic highs reached in early May as sawmills increased production and increased imports. However, the prices are still very high.
A survey from the National Association of Home Builders on Tuesday showed that confidence among builders of single-family homes fell to a 10-month low in June.
Higher costs and lower availability of softwood, copper, steel, and other building materials have driven up prices for new homes.
The NAHB blamed the tide in sentiment on “rising costs and lower availability of softwood and other building materials,” noting that this was driving up new home prices “which slowed the robust pace of homebuilding.”
Copper is in short supply, while tariffs on steel imports also add to construction costs, boosting new home prices and contributing to higher inflation. Some devices are also rare due to the global shortage of semiconductors.
A separate report from the Labor Department on Wednesday showed import prices rose 1.1 percent in May. This brought the year-on-year increase to 11.3 percent, the largest increase since September 2011, from 10.8 percent in April.
“The US is experiencing cost-push inflation, which has historically been shown to be more temporary than other causes of inflation, primarily demand-pull,” said Ryan Sweet, chief economist at Moody’s Analytics.
Demand for larger, more expensive accommodations amid the Covid-19 pandemic, which has left millions of Americans still working from their homes, is driving a housing market boom. The inventory of previously owned homes is close to its lowest level
Home prices have risen more than 15 years on an annual basis, raising concerns that some first-time buyers may be priced out of the market.
The housing market has been the star performance in the recovery of the economy. Investment in residential construction has enjoyed double digit growth since the third quarter of last year. Most economists expect housing to make a modest contribution to GDP growth in the second quarter.
“New residential construction remains strong, but building materials prices and availability are likely to remain significant headwinds,” said Charlie Dougherty, economist at Wells Fargo.
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