The Housing Market: Rising Inventories, Weaker Construction

Analyzing the U.S. housing market can be frustrating for numerous reasons, not the least of which is that external events – mostly weather – can have big impacts on the data. However, that’s mostly a winter issue. Another frustration is the fact that construction and sales naturally follow different timelines, so it is tricky to reconcile them in real time.

A particular vexing situation in the past couple of years has been the effects of high mortgage rates. Obviously, higher financing costs are a hurdle for buyers, but because of the long period of relatively low mortgage rates, high rates can freeze would-be sellers as well as they face the prospect of replacing those homes with units that not only cost more but are more expensive to finance.

Also, the housing market is not monolithic in terms of winners or losers as it applies to freight. Putting aside geographical deviations, tight inventories of existing homes on the market place a lid on sales but arguably encourage more residential construction. More sales of existing homes are great for dry van freight as those transactions often come with new furniture, flooring, appliances, etc. However, that activity does little for flatbed.

New construction also means more dry van freight, but it especially boosts flatbed.

The upshot is that rising inventories of existing as well as new homes likely will improve affordability and spur sales, helping dry van freight, but likely will soften demand for new construction, which would not be welcome news for flatbed.

With these distinctions in mind, let’s look at some figures for May.

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🏗️Construction Activity Slows

• Housing starts fell 9.8% month-over-month in May, marking the lowest seasonally adjusted level since July 2019 (excluding pandemic outliers).
• The decline was driven entirely by a 30.6% drop in multifamily starts, while single-family starts ticked up slightly (0.4% m/m).
• Starts are down 4.6% y/y, and the number of homes under construction declined for the 18th consecutive month.
• Builders appear increasingly cautious in response to growing inventories and tepid demand.

🏠 Inventory Builds Across the Board

• New home inventory hit 507,000 units, the highest since 2007.
• The months’ supply for new homes surged to 9.8 months, up from April and now the highest since September 2022.
• Existing home listings also increased, with the total number reaching levels not seen since June 2020.
• The market now holds a 4.4-month supply of existing homes, the most in more than four years.

This increase in supply could eventually help rebalance the market, but for now, it’s adding pressure on builders and may slow new construction even further.

📉 New and Existing Home Sales Diverge

• New home sales plunged 13.7% m/m in May – the sharpest drop since mid-2022.
• Sales were down 6.3% y/y, and the annualized rate of 623,000 units was the lowest since last October.
• Meanwhile, existing home sales rose slightly by 1.1% m/m and 0.3% y/y—the first positive annual comparison since January.

Although existing sales saw a modest bump, they remain constrained by affordability and the so-called “rate lock-in” effect noted has not gone away even though inventories have risen somewhat.

💸 Affordability Constraints Remain

• Mortgage rates declined for a fourth straight week last week, but the change is marginal.
• The 30-year fixed rate currently averages 6.77%, still near recent highs.
• Elevated rates continue to sideline many buyers and limit inventory turnover among current homeowners.

📊 Price Growth Cools, but Relief Is Limited

• Year-over-year price growth for existing single-family homes has slowed to below 2%, the lowest rate in nearly two years.
• While slower appreciation may be a welcome sign for buyers, high rates and persistent supply-demand imbalances are keeping housing out of reach for many.

Conclusion:
The housing market is not improving, but nor is it collapsing. Inventory is rising, which could improve options for buyers in the long run, but demand continues to be held back by affordability pressures and economic uncertainty. Moreover, stronger supply of homes on the market will likely depress demand for new construction.