In May, the number of new housing units that started construction hit its lowest point since 2020, largely due to the challenges posed by elevated interest rates.
The Commerce Department reported a 9.8% decrease in home construction from April to May. If this trend continues, the annual rate could drop to 1.25 million units, down from 1.39 million in April 2025.
Comparatively, this marks a 4.6% decrease from the same time last year when the rate was at 1.4 million units.
Ben Ayers, a national economist, noted, “Home construction plunged in May as builders moderated their activity in 2025 amid increasing demand and costs.”
New building permits also saw a 2% decline since April, although home completions increased by 5.4% in that month but still reflected a 2.2% decrease year-on-year.
The housing market is facing turbulence due to interest rate hikes implemented by the Federal Reserve in response to rising post-pandemic inflation.
While these interest rate increases are meant to combat inflation by reducing borrowing, they can paradoxically push home prices higher because of the increased cost of financing. Most home purchases are debt-financed.
According to the Consumer Price Index (CPI), inflation has decreased by 2.4% year-on-year, although shelter inflation stands at 3.9%. The housing sector has played a significant role in moderating overall inflation in the post-pandemic era.
This week, the average 30-year fixed-rate mortgage is at 6.84%, a notable rise from the pre-pandemic rate of about 3.5%.
Housing inventory has reached its highest level since November 2019, indicating availability in the market.
The U.S. continues to face a significant shortfall in affordable housing. Estimates from the National Association of Home Builders indicated a shortage of 1.5 million units in 2021, whereas Freddie Mac and the National Association of Realtors provided higher estimates of 3.8 million and 5.5 million, respectively.
On a related note, analysts indicated that the sharp decline in May’s construction numbers was primarily due to a slowdown in multi-family construction.
As Ayers pointed out, “A sharp downward shift in multi-family construction has driven the decline in May.”
