Construction on new homes declined unexpectedly last month, in a troubling sign for homebuyers already grappling with a dearth of homes for sale.

Housing starts in March dropped 14.7% from February to a seasonally adjusted annual rate of 1.321 million, according to data released Tuesday by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. They were down 4.3% year over year.

It marked the largest monthly percentage decline since April 2020, during the onset of the COVID-19 pandemic. The March figures were also the lowest total seen since August of last year.

The new-construction decline, which was larger than economists forecasted, could signal trouble for homebuyers. With the number of homes on the resale market remaining tight, newly built homes have provided a crucial housing boost for buyers.

“After an impressive February, this month’s new residential construction data falls more in line with previous months’ trends,”  Realtor.com® Senior Economic Data Analyst Hannah Jones said in a statement. “More for-sale and for-rent inventory will be key in easing rent and price growth in today’s under-supplied market, especially as existing homeowners find today’s market relatively inhospitable for a home sale due to high prices and mortgage rates.”

Within total housing starts, single-family starts fell 12.4% from February. However, starts were up 21.2% year over year in March.

Single-family permits, a sign of future construction, also dropped 5.7% from February. That was the first monthly decline in nearly two years. They were up 17.4% year over year.

Multifamily starts also dropped 20.8% in March from the prior month. That continued a downward trend for multifamily construction over the past year. Cooling rents and the sheer number of other projects that have been completed recently or are still in the pipeline have dented developer appetite for new condo, co-op, and rental projects.

“Looking ahead, we still think single-family starts stand to benefit from the lack of second-hand homes on the market, shifting demand to newbuilds,” said Capital Economics Property Economist Thomas Ryan in a note. “But that strength will be offset by weakness in multi-family starts, which we expect will remain around current levels, leaving total housing starts little higher than they currently are by the end of this year.”

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Housing starts fall in every region but the West

Monthly housing starts fell in March in the Northeast, Midwest, and South, but climbed 7.1% in the West and were up 48.1% year over year.

“Housing starts surged in the West in March, posting strong gains after an anemic 2023,” said Bright MLS Chief Economist Lisa Sturtevant in a statement. “This increase in new construction in the western region is a good sign for home shoppers there who have faced high prices and limited inventory,”

On a monthly basis, total housing starts declined 36% in the Northeast, 23% in the Midwest, and 17.8% in the South last month. Annually, starts were down in these regions, except for the Midwest where they were up 18% year over year.

Builders blame higher interest rates, inflation

Homebuilders say they face financing constraints on construction projects, as higher interest rates increase the cost of borrowing for both builders and buyers.

“Builders are grappling on several fronts as the inflation fight continues,” said Carl Harris, chairman of the National Association of Home Builders (NAHB) and a custom home builder from Wichita, KS. “Higher interest rates are increasing the cost of housing for prospective home buyers and raising the development and construction cost for builders of homes and apartments.”

Mortgage rates are climbing back towards 7% after March’s inflation rate came in hotter than expected at 3.5%, lowering expectations that the U.S. Federal Reserve will lower its interest rates anytime soon. Last week, the average rate on a 30-year fixed mortgage was 6.88%, according to Freddie Mac.

“Single-family starts were down in March as interest rates increased and multifamily production fell as builders faced tighter financing conditions,” said Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis. “And with single-family permits also down in March, single-family production will likely decline again in April.”

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