By Lucia Mutikani

WASHINGTON (Reuters) – U.S. single-family homebuilding fell in June, but permits for future construction rose to a 12-month high as a severe shortage of previously owned houses for sale supports new construction.

The decline in housing starts reported by the Commerce Department on Wednesday partially retraced an abnormally large 18.7% surge in May, which had pushed groundbreaking on single-family housing projects to an 11-month high.

Builders’ efforts to ramp up construction are, however, being frustrated by shortages of materials like electrical transformer equipment as well as higher borrowing costs. Housing completions fell last month and the stock of single-family homes under construction was the lowest in two years.

“The level of single-family starts remains robust, and we believe ongoing near-term strength is likely given the continued upward trend in permits,” said Mark Palim, deputy chief economist at Fannie Mae in Washington.

“If the economy continues to expand in the coming quarters, we think starts are capable of moving toward an annualized pace of 1 million units as demand remains sufficient given the ongoing lack of existing homes available for sale.”

Single-family housing starts, which account for the bulk of homebuilding, dropped 7.0% to a seasonally adjusted annual rate of 935,000 units last month. Data for May was revised higher to show starts vaulting to a rate of 1.005 million units, the highest level since June 2022, instead of 997,000 units as previously reported. May homebuilding was likely boosted by unseasonably warmer and drier weather.

In June, single-family homebuilding fell in the Northeast, Midwest as well as the densely populated South, but jumped 4.6% in the West. Single-family housing supply remains well below pre-pandemic levels, which should keep construction for this segment supported.

Strong growth in the multi-family housing segment, driven by demand for rental accommodation as higher mortgage rates priced out some potential home buyers from the market, appears to be fizzling. Apartment vacancy rates are rising and the stock of multi-family housing under construction is at a record high, which could discourage new construction.

Starts for housing projects with five units or more declined 11.6% to a rate of 482,000 units, the lowest since December.

With both single- and multi-family homebuilding declining, overall housing starts dropped 8.0% to a rate of 1.434 million units in June. Economists polled by Reuters had forecast starts decreasing to a rate of 1.48 million units.

Nevertheless, the housing market has likely reached a bottom after being pushed into recession by the Federal Reserve’s aggressive monetary policy tightening. A survey on Tuesday showed the National Association of Home Builders/Wells Fargo Housing Market Index increased to a 13-month high in July, with fewer builders reporting offering incentives to attract buyers.

But with the average rate on the popular 30-year fixed mortgage approaching 7%, according to data from mortgage finance agency Freddie Mac, the anticipated housing market rebound could be muted. Residential investment has contracted for eight straight quarters, the longest such streak since the collapse of the housing bubble triggered the 2007-2009 Great Recession.

Stocks on Wall Street were trading higher. The dollar rose against a basket of currencies. U.S. Treasury yields fell.

HOUSING STABILIZING

“Today’s report continues to suggest stabilization,” said Murat Tasci, an economist at JPMorgan in New York. “We expect the drag from residential investment to gradually dissipate with this continued stabilization.”

Permits for future construction of single-family homes increased 2.2% in June to a rate of 922,000 units, the highest since June 2022. Single-family building permits surged in the Midwest and South, but were unchanged in the Northeast and West.

Permits for housing projects with five units or more plunged 13.5% to a rate of 467,000 units, the lowest level since October 2020. The rental vacancy rate rose to a two-year high in the first quarter, likely limiting the scope for more new multi-family home construction.

Overall building permits dropped 3.7% to a rate of 1.440 million units last month.

The number of houses approved for construction that are yet to be started fell 2.1% to 281,000 units.

The single-family homebuilding backlog rose 0.7% to 141,00 units, while the completions rate for this segment fell 2.8% to a rate of 986,000 units.

The inventory of single-family housing under construction dropped 0.9% to a rate of 688,000 units, the lowest level since June 2021. The stock of multi-family housing under construction increased 0.7% to 977,000 units, the highest level since the government started tracking the series in 1970.

“The volume of multi-family units in the pipeline, along with weaker rental demand, and tighter lending standards point to a weaker pace of multi-family starts going forward,” said Nancy Vanden Houten, U.S. lead economist at Oxford Economics in New York.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)

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